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.

of its peers at www.barra.com). When evaluating your company’s plan, consider the investment choices, vesting period, whether the match is made in cash or company stock and the size of the match. To give you an idea, 32% of employers match at least 50 cents on the dollar, according to Hewitt.

If you have a good plan that matches at least some portion of your money, contributing to it is the first thing you should do when saving for retirement, says Michael Buccolo, director of equity marketing at New York-based AXA Advisors. At the very least, put enough money in each year to earn the match. Even though Livingston’s 403(b) currently offers only one fund, Stallworth recommends that she stay in it. “You get double savings: it’s pretax money that grows tax-deferred.”

“Unless your plan is absolutely terrible, I can’t think of anything more favorable to investors,” says Toian Bowser-Alexander, a certified financial planner with Financial Network Investment Corp. of Pasadena, California. “Even if you have three options, and they’re all index funds, you put in $10,000, you reduce your taxes and your employer matches 5% or 6%.”

Once you’ve worked your 401(k) as best you can, it’s time to tackle the third leg of the stool, your self-directed savings.

FIRST THINGS FIRST
With this component, it’s important to walk before you run. Bowser-Alexander stresses the importance of first building an emergency fund. “You don’t want to have to use your credit cards if the car breaks down,” she says.

Livingston is in the proc
ess of shoring up her just-in-case fund. “I’m looking at a money market account at my credit union for three to six months’ worth of emergency funds,” she says. She also plans on purchasing disability insurance.

Livingston recently got started on her savings plan by contributing to a Roth IRA. Unlike 401(k) accounts, which generally require you to invest in mutual funds, IRAs allow you to put money in any vehicle you choose, including funds, individual stocks, bonds or even unit investment trusts. But contributions to traditional and Roth IRAs are limited to $2,000 a year, far less than the amount you can put in a 401(k).

Contribute to a traditional IRA, and your money will grow tax-deferred. You may begin making withdrawals at age 591/2 (early withdrawals will be hit with stiff penalties) and must take distributions by 701/2 . If you work for a company that doesn’t offer a retirement plan, you can get a tax deduction for your contribution.

But for many investors, particularly younger ones like Livingston or those who don’t need the immediate tax deduction, a Roth IRA may be a better choice. Contributions, again limited to $2,000 a year, are made with after-tax money, but that money grows tax-deferred and will not be taxed when you withdraw it after retiring. What’s more, Roth IRAs are more flexible about early withdrawals and can more easily be passed along to children or other heirs. However, to qualify for a Roth, a single person must have an adjusted gross income of less

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