NPW

Savings at Work

Today's worker faces important issues about saving for the future. Sit back, grab a cup of coffee and consider the following:

Currently, Social Security replaces just one-half of pre-retirement income for an individual with an annual income of $15,000. It replaces less than one-quarter of the income of an individual who earned $68,400. The average Social Security retirement benefit is $925 per month.
Only a little more than half of civilian wage and salary workers currently have access to some kind of pension plan at work. Pension coverage is particularly low among people who work for small employers.
More than 65 percent of retired women are not receiving pension benefits, according to the Center for Retirement Research at Boston College.

If you find any of the above items startling, you're not alone. An increasing number of people are becoming aware that the traditional ways of financing retirement may no longer be an option. Unfortunately, many of us are not taking the steps necessary to compensate and to ensure a sound retirement.

Plan for Retirement
For many of us, retirement may seem like eons away. And in fact it may be many decades before it's appropriate or feasible for you to quit your job once and for all. But it's never too early to begin planning for your retirement. The planning only gets more difficult the later you begin. And by not planning at all, you might be cheating yourself out of any retirement at all.

Social Security Is Not Enough
Social Security has traditionally been the most important source of income for the majority of retirees. But Social Security was never intended to meet all of the needs of retirees. Rather, it was designed to ensure that everybody would have at least a minimal level of income in retirement. Moreover, Social Security will play a more limited role in the retirement picture as the age to receive maximum benefits rises —to 66 in 2005 and 67 in 2022. Even today, Social Security pays only 27 percent of final pay to a worker at $60,000; 42 percent at $40,000; and 56 percent at $20,000. In addition, many analysts contend that Social Security benefits will need to be reduced, or the retirement age raised further, before many of today's workers reach retirement.

Pension Plans
Surprisingly enough, Social Security coupled with the proceeds of your employer's pension may not meet your retirement income needs. Only 47 percent of all civilian wage and salary workers actually participate in employment-based retirement plans. Of those workers who do opt to participate, many don't take full advantage of the savings opportunities.

Personal Savings
The fact is, a sound retirement plan has three components: Social Security, an employer-assisted pension plan and personal savings. It is important that you regard each component like a leg of a three-legged stool. If your retirement plan is missing any of the components, it will be unstable.

Check Your Withholding
An excellent way to begin your savings odyssey is by talking to your company's payroll staff. They can help point you in a direction that will ensure you are having the correct amount in taxes withheld from your pay. While you may enjoy receiving a tax refund each spring and therefore ask your employers to withheld more taxes on your pay than necessary, doing so may actually cost you money. By reducing your withholding —within the legal limits, of course —you will actually be giving yourself a raise. A wise use of that money would be to put it in an interest- or dividend bearing account so it will work for you. Why give Uncle Sam an interest- free loan?

To test your W-4 results, visit the IRS the web site with the W-4 calculator.

Advantages of Direct Deposit
You can also promote savings by having your pay deposited directly into your bank account. Many employers offer this service free of charge to their workers. When you opt for "direct deposit," your money begins earning interest for you immediately. Plus you no longer have to worry about losing your paycheck or squandering it once it's cashed. In many instances you can ask to have part of your pay directed to two or more accounts. Those accounts probably don't even have to be at the same bank. So you can opt to have part of your pay directed to a savings account, part to a checking account and part to an investment vehicle such as a money market or mutual fund account.

Useful Savings Tips

If your employer offers a 401(k), 403(b), 457 defined contribution plan or other tax advantaged retirement plan, invest the maximum amount you can possibly afford. Money you contribute this way is deducted from your paycheck before tax withholding is calculated. This reduces your taxable income. So you save money that otherwise would go toward income taxes. Why give that money to Uncle Sam if you don't have to?
If your employer makes matching contributions to your retirement plan, contribute as much as you can. That way you will double your savings. (Be aware, however, that your employer may require you to work for a minimum number of years in order to be eligible to receive the matching contribution when you leave.)
And of course there's always the possibility of spending less. Take a close look at your own spending habits. Do you spend money unnecessarily —on coffee, clothes, drinks, etc. You may have a sizable opportunity to increase your savings just by tweaking your everyday habits.