Is Your 401(k) Still o(k)?


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With the 401(k) generation beginning to retire, it begs the question: Is your savings going to be enough? (If you're already retired, check out the Retirement Ten Commandments .)

The Center for Retirement Research at Boston College doesn't seem to think so. According to a recent Yahoo! article by E.S. Browning, "The retirement savings plans that many Baby Boomers thought would see them through old age are falling short in many cases."

The study, conducted by the Center for Retirement Research, compiled data from the Federal Reserve to analyze the 401(k) balances and annual salaries of those age 60 to 62. They assumed an average annual retirement income need of $75,000, and found that the median household with a 401(k) account has "less than one-quarter of what is needed in that account to maintain its standard of living in retirement."

We have always defined wealth as the ability to sustain your desired standard of living indefinitely over time without work or worry. It is not defined by the number at the top of your account statement. Your 401(k) account value will fluctuate up and down as the market does, so this number is not a true representation of your wealth. The amount of cash flow your portfolio can produce to pay your bills, on the other hand, is the number you should be paying attention to.

Experts estimate Social Security will provide as much as 40% of pre-retirement income, or $35,080 a year for that median family. If the average household needs $75,000 in retirement, that leaves a $39,920 gap that must come from other sources. According to the study, "most 401(k) accounts don't come close to making up that gap."

Those who are lucky enough to receive a pension will have it a little easier, but what do these 401(k)s look like? The Center for Retirement Research reports that the median 401(k) plan held $149,400, including plans from previous jobs. Surprisingly, the study did not use the industry-standard 4% withdrawal rate to make income calculations, which we have always believed to be erroneous. To figure the annual income provided from the median 401(k) account, analysts examined what the family would receive from a fixed annuity.

The fixed annuity figures were based on a product from New York Life, a long-standing and well-known insurance company. According to New York Life, the average 401(k) would generate just $9,073 a year for a couple, which is less than one-quarter of the shortfall mentioned above. Not only is $9,073 a year insufficient, but a fixed annuity does not answer the issue of rising costs in the future. Since the amount remains the same, it will become worth less and less as inflation grows.

But what if you could take that same amount in the 401(k) account and increase your annual income compared to what the fixed annuity gives? What if you could create a 12% yield in real cash to pay your bills each month without losing purchasing power or touching your principal? You don't have to lock yourself into a low-yielding fixed annuity. You don't have to sell assets at a loss and incur reverse compounding .

There are better alternatives to reaching your financial goals, such as a cash flow strategy like the Snider Investment Method®, which may mean that the value of your 401(k) is not as key to your retirement success as the Yahoo! article implies. The article offers some insight to help pre-retirees meet their goals -- save more, work a little longer, refine your budget -- but with the right investment strategy , you may be closer to retirement than you think.

The intent of this article is to help expand your financial education. Although the information included may be relevant to your particular situation, it is not meant to be personalized advice. When it comes to investing, insurance and financial planning, it is important to speak to a professional and get advice that is tailored to your unique, individual situation. All investments involve risk including possible loss of principal. Investment objectives, risks and other information are contained in the Snider Investment Method Owner's Manual; read and consider them carefully before investing. More information can be found on our website or by calling 1-888-6SNIDER. Past performance is not indicative of future results.

The 1% yield objective of the Snider Investment Method is a goal and not a guarantee. The yield calculation is different than the total return calculation typically shown by most in the investment industry. The percentage yield is realized gains as a percentage of the amount invested. The yield is approximately equal to the total return if and when a position closes. While the position is open, there is typically some amount of unrealized loss. The total return measurement would include these losses and so would be lower than the yield. While the rules of the Snider Method prohibit selling stocks at a loss, this does not limit or prevent the accumulation of unrealized losses. Nor does it guarantee that a position will eventually close or that unrealized losses won't persist indefinitely.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Personal Finance , Retirement

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