Your Retirement Problems Solved

To have a financially secure retirement, you have to make the right moves before the time comes. So we get a lot of questions about how to save enough. We've tackled some of these tough problems below.

Should I take a pension or lump sum?

I have lousy 401(k) choices in my plan.

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Is it a good idea to borrow from my 401(k)?

I've maxed out my 401(k). Now what?

Should I Take a Pension or Lump Sum?

Traditional pensions provide a guaranteed stream of income you can't outlive. But Carol and Rick Shaw of Palm Harbor, Fla., wonder if it's possible to have too much of a good thing. Both of the Shaws are police officers, and each qualifies for a traditional pension. They hope to retire in six years, when they will still be in their fifties.

It's important to compare the monthly pension benefit you would get from your employer with the income your lump sum would buy if you used it to purchase an annuity (go to www.annuityshopper.com), says Lance Alston, vice-president and principal at JWA Financial Group, in Dallas. You also need to decide which is more important: guaranteed retirement income for you and your surviving spouse or a legacy for your heirs (assuming you don't spend your entire lump sum during a lengthy retirement).

Also consider your health and that of your company. If you have a serious medical condition, you may want to forgo the pension and go for the lump sum. Ditto if your company's finances are shaky.

When Carol crunched the numbers, she decided that the couple could live comfortably on Rick's pension, thanks to a mortgage that will be paid off by the time they retire, access to subsidized retiree health benefits, and prepaid college tuition contracts for their three children, ages 11 to 19. In addition, both Carol and Rick will be eligible for Social Security at age 62.

If Carol chooses a lump sum over a monthly pension, she will sacrifice the annual cost-of-living adjustment. But she figures her investment earnings can easily outdistance the COLA and finance discretionary spending. With luck, the Shaws will have something left to leave their kids. -- Mary Beth Franklin

I Have Lousy 401(k) Choices in My Plan

Jim Murphy's employer, a small computer-software company in Dallas, switched to a new 401(k) provider last year, and Murphy isn't happy. The new plan includes mutual funds with higher expenses and poorer performance records than the Vanguard funds he held before. He wants to know if he can ask his boss to let him invest his 401(k) money elsewhere.

Unfortunately, he can't. Unless your 401(k) gives you the option to invest through a brokerage, you're stuck with the funds in your plan. But that doesn't mean you shouldn't participate -- especially if your employer offers a matching contribution.

An employer might put in, say, 50 cents for every dollar that an employee contributes, up to a certain percentage of salary, often 6%. Murphy's boss deposits an amount equal to a whopping 11% of an employee's salary into the 401(k), regardless of whether the employee contributes a dime. So Murphy can't afford to ignore the company's largess.

He decided to allocate his employer-provided money among the best of the plan's funds and to round out his portfolio by contributing money to a Roth IRA, in which he can select his own investments. The Roth is a smart choice because Jim and his wife, Stephanie, earn too much to deduct his IRA contributions. (If you participate in a retirement plan at work, you can't deduct your contributions to an IRA if you are single and your income exceeds $62,000 or if you are married and your joint income exceeds $103,000 this year.)

But their combined income is below the $166,000 cutoff for Roth IRA contributions in 2007. Although there's no up-front tax break, the Roth IRA will provide tax-free income in retirement. You can contribute up to $4,000 to a traditional or Roth IRA this year (add $1,000 if you're 50 or older).

In the meantime, Jim and his co-workers should lobby their boss for better investment choices. Assuming the boss contributes to the same plan, he'd benefit, too. -- Mary Beth Franklin

Is It a Good Idea to Borrow From My 401(k)?

Nope, not even to pay off debt. If you leave -- or lose -- your job, you generally have to repay the loan immediately or pay taxes on the money plus a 10% penalty if you're under age 55. Even if you don't take a tax hit, you'll lose the compounded earnings your money would have accrued had it remained in the account, potentially costing you hundreds of thousands of dollars.

I've Maxed out My 401(k). Now What?

Contribute to a Roth IRA if you're eligible (your income doesn't exceed $114,000 if you're single or $166,000 if you're married). What if you earn too much? Consider making nondeductible contributions to a traditional IRA and converting to a Roth in 2010, when income limits for conversions disappear. Or invest in taxable accounts.