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.

than $110,000 and a married couple less than $160,000.

Which IRA is right for you? There’s no cut-and-dried winner, but Buccolo is among those experts who lean toward the Roth. “If you qualify, and you don’t need the write-off, it’s more flexible about withdrawals and it’s tax-free,” he says. (For more on traditional vs. Roth IRAs, see “Last-Minute Tax Savers,” February 2000.)

If you’re one of the growing number of Americans hatching your own company or working as an independent contractor, you have several other account choices. (See “Options for Entrepreneurs” on www.blackenter prise.com.)

Once you’ve maxed out your 401(k) and IRA contributions, you may want to consider an annuity. Annuities are contracts sold by life insurance companies that invest your money and stipulate a specific annual income after retirement. Annuities come in two flavors: fixed and variable. A fixed annuity, the more conservative choice, has a set rate of return; a variable annuity, which is invested in stocks or other vehicles whose returns can go up or down, has a fluctuating rate of return.

Contributions to annuities are tax-deferred, and-unlike all other accounts-are unlimited.

Sound good? They can be, but “they come with internal expenses, and you’re trading maximum growth [as from an equity mutual fund] for guaranteed income,” says Bowser-Alexander. Annuity fees range from a surrender charge of as much as 10% of your principal if you want to cash out early (plus a 10% tab payable to the IRS if you do it before age 591/2) to annual maintenance fees of $25 to $50. To win over investors who prefer mutual funds with low fees, insurance companies have begun to add bells and whistles such as sign-up bonuses of 3% of your principal and guaranteed minimum death benefits.

Consider an annuity, says Burleigh, “if you’re an investor who has already contributed to other accounts, or if you feel comforted by the idea of a predictable income stream after retirement.”

When it comes to selecting investments for your retirement accounts, a common mistake is playing it too safe. “I’m a firm believer in equities,” says Buccolo. “People need to have that growth if they want to beat inflation and have enough to live on.”

Bowser-Alexander concurs, and for this reason she doesn’t recommend traditional asset-allocation models. “Typically they include cash equivalents and bonds,” she says. “Cash belongs in your personal account, and I only recommend bonds if they’re in a balanced fund. Most people planning for the long term need growth, not income.”

Long-term growth is exactly what Darryel Boone, 25, has in mind. Boone is currently in a Catch-22 situation with his 401(k). He still has funds in the plan of his former employer, the credit card division of a major financial services company, but he doesn’t want to roll over the funds to his new employer, “because I’m not sure I’ll be staying much longer.” Boone has entrepreneurial aspirations and is laboring to get his fledgling independent record label, Products of Tha Streets Ent., off the ground.


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