Are You Thickheaded About Retirement?

Physician's Money Digest August 2005
Volume 12
Issue 12

New Webster's


According to the , the definition of"thickheaded" is "Someone whois age 591/2 or older, and who is eligiblebut not contributing to their pension planor 401(k) plan where the employer offersa matching contribution."


Well, this isn't actually what says, but it could be one definition. Mostemployer 401(k) plans pay a matchingcontribution of 50% up to the first 6% onemployee compensation. So if you make$50,000 and contribute 6% of your pay toyour 401(k) (ie, $3000), your employerwould match with a $1500 contribution.This is free money and is the equivalent ofan automatic 50% return on your investment.There is no other investment thatwill yield you this high a return.

While you should take your employerup on this free offer no matter what yourage, it is especially important to do so ifyou are over age 591/2 At this age, thereare no longer any penalties for early withdrawalfrom your 401(k). If you areyounger than age 591/2 the federal governmentwould charge you a 10% penalty.Also, at this age you're likely to be closeto retirement and the next few years willbe your last opportunity to accumulate asignificant amount of money.

Stubborn Excuses

Studies suggest that some 30% to 40%of eligible employees do not participate atall in their employers'401(k) plans. And,of those who do participate, as many as40% don't contribute enough to fully takeadvantage of the employer's matchingcontribution. Why are workers so willingto leave this free money on the table?Two of the most common excuses are:

•I can't afford to contribute. If notnow, when? I have been working withpeople and their finances for over 30 yearsand I have never found an instance wherea person couldn't cut expenses by 10% ormore. If you decide this is a priority, youcan find a way. One simple strategy is todivert all pay raises into your 401(k) planuntil you are at the maximum allowed.

•I don't understand investments.Many 401(k) plans offer a lifestyle option,which means that all the investmentguesswork is handled for you professionally.These lifestyle funds become progressivelymore conservative as you approachthe normal retirement age. The investmentmanager makes all of the investmentdecisions for you, including rebalancingyour portfolio as needed. If your plan doesnot offer a lifestyle fund, suggest to youremployer that it should. Also, ask yourhuman resources department to have a401(k) representative meet with you to discussyour options. You won't be able to getindividual investment advice, but you'll beable to get useful information about yourplan and its specific choices.

Government Intervention

Participation in 401(k) plans is low, yetso important that Congress is consideringgetting involved. Current proposalsinclude requiring that companies matchemployee contributions dollar-for-dollarfor the first 3% of pay and 50 cents on thedollar for the next 2% of pay. Proposalsinclude a saver's credit for low-incomeemployees, whereby the governmentwould reimburse eligible participants formaking a contribution. Corporations arealso proactively addressing the problem oflow participation by enacting automatic401(k)s. Under this feature, an employee isautomatically enrolled in the company401(k) plan when they become eligibleunless the employee opts out by givingwritten notice that they do not want toparticipate in the program.

It's sad that our government and corporationsmust go to such lengths to getpeople to do what they already knowthey should. Lest you find your pictureunder "thickheaded," make sure you areinvesting enough to capture your employer's401(k) plan matching contribution.

®, AEP,

is the founder of the Welch

Group, LLC, which specializes in

providing fee-only wealth management

services to affluent retirees

and health care professionals

throughout the United States. He is the

coauthor of J.K. Lasser's New Rules for Estate

and Tax Planning (John Wiley & Sons, Inc;

2001). He welcomes questions or comments at

800-709-7100 or visit

This article was reprinted with permission from

the Birmingham Post Herald.

Stewart H. Welch III, CFP

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