We’ve come a long way these last several months in our series about 401k design and best practices. But, even after it’s established, the employees still need to use it. It sounds so silly to put it so simply, but that’s where even the best laid plans of mice of men hit a brick wall. It’s all about the execution of the plan. It’s all about the participation.

            The most common questions that arise are, “How much should I put in?” and “What do you think I should invest in?”  Neither is really an easy answer as each person’s goals, needs, and financial abilities tend to differ.

            For someone who is living on a limited budget and is having a hard time making ends meet, funding a retirement plan of any kind seems like a pure luxury. However, the beauty of most plans is that contributions can be pretty low.  If you want to put in $10/paycheck, you may be able to.  I always advise everyone do something. It creates a good habit and gets you used to the idea of paying yourself first. This can be especially helpful when the plan has a match (say dollar for dollar up to 4% of salary) and you’re getting extra money from your employer.

            Ah yes, the wonderful magical “match”.  This is simply one of the most powerful tools in the financial planning arsenal. For someone with a $50,000 salary who puts in $2000/year (or 4%) into their 401k and gets a full match up to 4%, they get an extra $2000 per year from their employer. Now, I want you to hold onto that sentence very tightly until the end of this column. No, didn’t mean literally…you’re crumpling up the page.

            For plans that don’t have a match, or perhaps just use a Safe Harbor provision (when the company puts in money to your account regardless of your contributions), it’s pretty cut and dry.  Save what you can, but plan ahead for tax consequences down the road.

            It’s generally held by many, that putting as much as you can into your 401k is the best thing to do. You’re saving for retirement and getting a nice tax deduction. True. However, the problem with this semi-misguided, over-generalized philosophy is that you’re going to have to pay taxes at some point. So, do you really want every single dollar you need to survive in your retirement years fully taxable?  I don’t!  Who knows what tax rates will be by then?

            With the federal government maxing out credit lines and printing money like it’s candy, I don’t think we’re going to likely see tax rates hold or go down if this trend continues unchecked. The question then becomes, do you want to save on taxes now on what you put in? Or, would you rather save taxes on everything coming out the back? My advice is to try and create a hybrid strategy so you have both.  You can fund your 401k at work and perhaps a Roth IRA on your own, if you’re eligible. If you’re not eligible for a Roth IRA, you can still create a tax advantaged retirement supplement using a high-caliber permanent life insurance device. Of course, there must be a need for life insurance first and foremost, but since the vast majority of folks are grossly underinsured, this is generally not an issue.  Make sure you have a financial advisor well-versed in these products. Your typical advisor or stockbroker generally has limited resources and knowledge of these.

            Here’s the bottom line:

            Participating in a 401k plan does NOT require you to play the stock market, but MAY entitle you to extra benefits from your employer! Try to contribute at least up to the match, if there is one. But, don’t get carried away and think that this vehicle is your total retirement nest egg. You need diversity, not only in investments, but in taxes as well. And, make sure that you take those assets with you when you leave your employer. Not only do you want the opportunity to seize full control of what you built up, but you want to tailor the investments even further to your needs.

            Now, remember that sentence I told you to hold onto?  Matching can provide a sort of pseudo-insurance on what YOU save for retirement out of your own paycheck. Here’s the punch line and the closer:

            If your 401k has a match like the one in my example or something similar, did you lose YOUR money in the last 9 months when the market dropped 45% ….or your employer’s?  Chew on that one ‘til next month.