When Your 401(k) Isn’t Enough

Only one in 10 people are properly preparing for retirement. Here's how to make sure you're on track.

his clients prepare for retirement, says a reasonable approximation is 80% per year of the income you had during your peak earning years. When you multiply your yearly income estimate by the number of years you have until you retire, you’ll have a pretty good idea of just how large a nest egg you need.

For more help, fill out the retirement planning worksheet in the black enterprise Wealth-Building Kit (call 877-WEALTHY toll free or log on to blackenterprise.com for your copy), or try an online retirement calculator such as those at www.quicken.com, www400.fidelity.com or www .asec.org, the site of the American Savings Education Council.

Most Americans will depend on three things to fund their retirement: Social Security, an employer savings plan and their own savings and investments. The first pillar, Social Security, is plagued by problems. According to the RCS Minority Survey, 62% of African Americans say they began saving because they felt they can’t count on Social Security. However, it’s unlikely that the system will be completely dismantled, and most of us will receive a monthly check. For an estimate of what your monthly Social Security payments will be, based on your employment history, complete a form on the Social Security Administration’s Website at www.ssa.gov.

Replacing old company-funded pension plans, 401(k) plans are the second leg of the retirement savings stool. In 2000, employees can contribute up to $10,500 to their 401(k) accounts each year. Contributions are made before taxes, so they’ll reduce your annual income tax bill. Many companies-particularly larger ones-sweeten the pot by matching employees’ contributions. Matching amounts vary considerably, but average about 50 cents for every dollar, according to the management consulting firm Hewitt Associates in Lincolnshire, Illinois. That free money, combined with the tax advantages and the regular contributions, make 401(k)s an almost unbeatable way to save for retirement-that is, if you have a good plan.

Although the federal government has general guidelines for 401(k) plans, companies have some leeway in creating them, so the quality of plans varies widely. A good chunk of companies, particularly small or new ones, fail to offer matching contributions. Others make the match in company stock. That’s great if you happen to work for Microsoft or Cisco, but in most cases, owning too much company stock leaves you vulnerable to the fate of one company and hurts your portfolio’s diversification. Most 401(k)s also have vesting periods-the length of time you must participate in the plan before becoming eligible to retain matching contributions-that may be as long as six or seven years.

By far the biggest drawback to some plans is the lack of diversity among their investment choices. Typically, the choices are from a single fund “family” such as Fidelity Investments or T. Rowe Price. You may, for example, want to invest in small-cap or international stocks, and your plan may only include large-cap domestic stock funds. And some plans only offer funds that are underperformers in their class. (You can see how a fund’s return stacks up against a benchmark

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