403(b) plan is protected if firm fails
Dear Liz: I have a 403(b) retirement account at one of the financial firms that nearly failed but that found a last-minute buyer. That made me wonder what would happen to my retirement money if the company had failed. My money is all in a money-market fund.
Answer: Assets in retirement accounts such as 403(b)s and 401(k)s are held separately from the plan provider's other assets and are protected in case the provider goes bankrupt.
That said, you have no protection from market fluctuations in a retirement account, and as we've seen, even money-market funds carry risk. Your best bet is to maintain a broadly diversified portfolio.
Put saving for retirement first
Dear Liz: My husband and I are both 44. We have a combined income of $100,000 but have only $20,000 saved for retirement, plus about the same amount in credit card debt. We have one child in college and one in private school, plus a house payment of about $2,000. Should we pay our debt with retirement money or keep that money and pay off our debt as we can? We never seem to have any money to save at the end of the month. Help!
Answer: Help, indeed. You're far behind in saving for retirement. Don't make matters worse by squandering your meager funds paying off credit card bills. You would lose $5,000 or more to taxes and penalties, plus any future tax-deferred returns. Your cash-out could easily cost you tens of thousands of dollars in lost future retirement income.
How much you'll actually need to retire depends on a number of factors, but you should play with some retirement calculators to get an idea of the cost. One financial expert, Roger Ibbotson, suggests that a couple in your situation would need to save 25% of their income to have a reasonable chance of not outliving their money if they retire at 65.
Even if you can't save that much right now, you need to reorder your priorities so that retirement savings come first, not last. Leaving it until the end of the month is a recipe for failure.
If you have 401(k)s at work, take advantage of those. If not, set up automatic transfers to individual retirement accounts.
Your mortgage is reasonable, so what's probably killing you are education expenses. If you can't cut back other expenses enough to accommodate retirement savings and tuition, the education costs have to be cut. Your child in college may need to take on more loans or switch schools; you may need to explore other options for the child in private school.
