MONEY 401(k)s

Why Workers Would Take a Pay Cut for This Retirement Benefit

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A 401(k) employer match is so valuable that many workers would be willing to lower their pay to get a bigger one, a survey finds.

Would you willingly take a pay cut? A surprising number of workers say yes—if it means getting a richer 401(k) match.

That’s one of the findings from a Fidelity Investments survey released today. When workers were asked if they’d prefer to have lower compensation in return for a higher 401(k) employer contribution, 43% chose the pay cut. As the responses show, many workers realize that it would be worthwhile to accept “a short-term pay cut for a long-term payoff,” says Fidelity vice president Jeanne Thompson.

The results also show that more people are worried about achieving a financially secure retirement, which seems increasingly out of reach. For many workers, a 401(k) plan is their sole means for saving for retirement, while an employer match is the closest thing to a free lunch that you can get. But a 401(k) match is more than a nice fringe benefit—depending on your ability to save, it may even make or break your retirement.

Why is a 401(k) match so crucial to retirement success? Consider that most workers need to put away 10% to 15% of salary in their plan to be on track to a comfortable retirement, financial advisers say. But the typical saver stashes away only 8%. So to get to that 10% or higher savings rate, the average worker needs a boost from a company match. Overall, employer matches account for more than 35% of total contributions to the average worker’s 401(k) account.

That brings up one bright spot in the survey: The typical employer match is now 4.3% of pay, which comes to an average of $3,450 per worker a year. That’s a jump of more than $1,000 compared with the average employer contribution 10 years ago.

There are good reasons for employers to offer tempting 401(k) matches. Companies can deduct the contributions from their corporate taxes, and the benefit is a valuable tool for attracting talent and retaining employees, especially as the job market improves. Only 13% of workers surveyed said they’d take a job with no company match, even if it came with higher pay.

Of course, the fact that Fidelity is asking workers to choose between a match and pay cut is another stark reminder that Americans are largely on their own when it comes to saving for retirement. “Many people used to have a pension plan. That’s not true for younger workers today, and even many Baby Boomers who had pension plans have had them frozen,” says Thompson.

If your 401(k) lacks a generous match, it’s crucial to step up your own savings. One relatively painless way to do it is start with a 1% increase in your savings rate. For each $33 reduction in your take-home pay, you will add $220 to $330 to your future retirement income. (To see how different savings rates will boost your nest egg, try this retirement income calculator.) At the very least, save enough to get your full 401(k) match.

MONEY retirement planning

How Today’s Workers Can Dodge the Retirement Crisis

For Millennials and Gen X-ers, it all depends on whether we can rein in spending after we stop working.

Trying to figure our whether mid-career folks like myself are adequately preparing for retirement can get a bit confusing. If you look at Boston College’s National Retirement Risk Index (NRRI), as of 2013 as many as 52% of households aged 30-59 are at risk of falling at least 10% short of being able to produce an adequate “replacement rate” of income.

That doesn’t sound too good, does it? But a discussion of the methodology of this survey and others at a recent meeting of the Retirement Research Consortium in Washington D.C., shows that things might not be so dire after all.

It turns out that the NRRI might be setting an unrealistically high bar for retirement income. The index’s replacement rate assumes that a household’s goal is to maintain a spending level in retirement that is equal to their pre-retirement living standard. It also includes investment returns on 401(k)s and IRAs in its calculation of pre-retirement income, even though those earnings are specifically earmarked for post-retirement. By including those investment gains, the NRRI may be targeting a replacement rate that is too high, causing more households to fall short, as Sarah Holden, director of retirement and investment research at the Investment Company Institute, pointed out in the meeting.

It’s already hard for someone in their 30s or 40s to figure out how much they need to be contributing today to replace the income they will have right before they retire. Adding to this guessing game is the debate over whether spending really goes down in retirement. You’ll pay less for work lunches, commuting expenses, and so on, but you might spend more for travel in the early years of retirement and, later on, more for health care costs.

In contrast to the NRRI calculations, many financial planners assume that would-be retirees will automatically cut spending when their children turn 21, and therefore only need to replace about 70% to 80% of their pre-retirement income. But as Frederick Miller of Sensible Financial Planning explained at the consortium’s meeting, that’s simply not the case anymore. He sees many clients continuing to support their adult children, helping them to pay for health insurance, rent, graduate school or a down payment on a home. While generous, this support obviously detracts from retirement savings.

So which assumption is correct? Should we be saving with the expectation of spending less in retirement or not? In reality, we should certainly prepare for eventually reducing consumption since, in the long run, we may have no choice about doing so. When spending does decline after retirement, it is almost twice as likely due to inadequate financial resources rather than voluntary belt-tightening, as Anthony Webb of Boston College discovered in a small survey of households.

The question of how much is enough will vary greatly by household. But it’s clear that my generation, and those that follow, face stiff headwinds—longer life expectancy, a likely reduction in Social Security benefits, and low interest rates, which greatly reduce the ability to generate income. Cutting back on spending during retirement, as well as during our working years, may be the single greatest contributor to our financial security that we can control.

Konigsberg is the author of The Truth About Grief, a contributor to the anthology Money Changes Everything, and a director at Arden Asset Management. The views expressed are solely her own.

MONEY Investing

Do You Really Need Stocks When Investing For Retirement?

Senior man on rollercoaster
Joe McBride—Getty Images

You may want to skip the thrills and chills of equities. But if you stick with bonds, be ready to do serious saving to reach your goals.

Even when stocks are doing well—and they’ve been on an incredible run the past five years with 17% annualized gains—there’s always a looming threat that the bottom could fall out of the market as it did when stock values plummeted more than 50% from the market’s high in 2007 to its trough in 2009. So it’s understandable, especially now when doubts abound about the longevity of this bull market, that you might ask yourself: Should I just skip stocks altogether when investing for retirement?

But if you’re inclined to give stocks a pass—or even just considering that option—you should be aware of the drawbacks of that choice. And, yes, there are substantial drawbacks.

Despite their gut-wrenching volatility—or, more accurately, because of it—stocks tend to generate higher returns than other financial assets like bonds, CDs and Treasury bills by a wide margin over the long term. That superior performance isn’t guaranteed, but it’s been pretty persistent over the last 100 years or longer.

Those higher long-term gains give you a practical advantage when it comes to saving for retirement. For a given amount of savings, you are likely to end up with a much larger nest egg by investing in stocks than had you shunned them. Another way to look at it is that by investing in stocks you can build a large nest egg without having to devote as much of your current income to savings.

Just how much of an advantage can stocks bestow? Here’s an example based on some scenarios I ran using T. Rowe Price’s Retirement Income Calculator, which you can find in Real Deal Retirement’s Retirement Toolbox.

Let’s assume you’re 30, earn $40,000 a year and are just beginning to save for retirement. The calculator assumes you’ll want to retire on 75% of your salary, so the target retirement income you’re shooting for is $30,000 (This is in today’s dollars; the calculator takes into account that your income will be much higher 35 years from now.)

First, let’s see how much you would have to save if you invest in, say, a mix of 70% stocks and 30% bonds, certainly nothing too racy for a 30-year-old with 35 years until retirement. To have at least a 70% chance of retiring on 75% of your pre-retirement salary at age 65 from a combination of Social Security payments and draws from your nest egg, you would have to set aside roughly 15% of your salary each year. (Or, if you have an employer generous enough to match, say, 6% of your salary, you’d have to kick in only 9% to reach 15%.)

You could improve that 70% probability by saving more or homing in on low-cost investment options, but let’s stick with the scenario above as a baseline for comparison.

So how would you fare if you decide to skip stocks altogether and invest solely in bonds? Well, if you stick with a 15% savings rate, your chances of being able to generate 75% of your pre-retirement income would drop to less than 20%. Not very comforting. You can boost the odds in your favor by saving more. But to get your chances of generating 75% of pre-retirement income back up to the 70% level, you would have to save almost 25% of your income each year. That’s a standard most people would have trouble meeting.

And the percentage of salary you would have to save would be even higher if you decide to hunker down in cash equivalents like money funds and CDs: just under 30%, or almost a third of your income.

Even if you had the iron will and perseverance to meet such lofty savings targets, diverting so much income from current spending to saving could seriously diminish the standard of living you and your family could enjoy during your career.

Just to be clear, I’m not suggesting anyone should just load up on stocks willy-nilly. That would be foolish, especially as you near or enter retirement, when a stock-market meltdown could derail your retirement plans. Indeed, in another column, I specifically warn against relying too much on outsize returns (whether from stocks or any other investment) to build a nest egg. Smart investing can’t replace diligent saving.

The point, though, is that stocks should be part of your investing strategy prior to and even during retirement. The percentage of your savings that you devote to equities can vary depending on such factors as your age, how upset get when the market goes into a steep funk and how much you’re willing to entertain the possibility of not having enough money to retire comfortably or running short of dough during retirement. Some of the links in my Retirement Toolbox section can help you settle on a stocks-bonds mix that makes sense for you.

But if after considering the pros and cons, you decide stocks just aren’t for you, fine. You’d just better be prepared to save your you-know-what off during your career, and keep especially close tabs on withdrawals from your nest egg after you retire.

Walter Updegrave is the editor of RealDealRetirement.com. He previously wrote the Ask the Expert column for MONEY and CNNMoney. You can reach him at walter@realdealretirement.com.

More From RealDealRetirement.com:

Is Sex The Secret To A Happy Retirement?

How An Early Start On Saving Can Get You an Extra $250,000 or More

What’s Your Number? Who Cares?

MONEY financial literacy

Why Workers and Retirees Missed the Roaring Bull Market

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Jupiterimages—Getty Images

Investor optimism dips, especially among retirees, a new survey finds. Maybe it's because 1 in 10 investors haven't noticed the huge gains in the market.

Quick, how much did the stock market gain last year? Tough question, right? Okay, let’s try a multiple choice: Based on the S&P 500 index, did the market rise 10%, 20%, or 30%? Evidently, that’s a tough question too because the vast majority of investors haven’t a clue.

Only 11% of adults with at least $10,000 in savings and investments got it right in a Wells Fargo/Gallup poll. This stands in stark contrast to the 67% that rate themselves somewhat or highly knowledgeable about investing and underscores the extent to which so many people simply don’t know what they don’t know.

For the record, the S&P 500 rose 30% in 2013—you received a total return of 32% if you reinvested dividends. This is the 13th biggest gain in a calendar year since 1926. Forget about getting the percentage right. Anyone paying attention should at least know that last year was a huge winner. Yet only 64% of investors even knew the market was up. Of those who did, 57% thought the gain was just 10% while 27% thought the gain was 20%. About 1% was looking through rose-colored glasses and thought the market rose 40% or more.

The poll also found that retirees were feeling much less optimistic in the second quarter. The Wells Fargo/Gallup Investor and Retirement Optimism index declined modestly overall but the portion looking only at retirees plunged 41%. This too seems incongruous. Second-quarter GDP surged 4%, one of the sharpest quarterly gains since the Great Recession.

One reason for this gloom is that about half of both retirees and workers are worried they will outlive their money, the poll found. Sadly, this may be a self-fulfilling prophecy. Playing it safe and earning 1% in a money market account won’t amount to much over time. Meanwhile, those who stayed true to a diversified portfolio of stocks through the downturn are doing better than ever. They were present for that 32% market gain—even if they have no idea how great last year was for them.

As a whole, the findings suggest that many people remain fixated on the past. The recession was a harrowing and humbling experience. But it is over. Real estate prices have turned up and the job picture is better. The stock market has more than doubled from the bottom. Yet when asked what they would do with a $10,000 gift, 56% in the poll said they would hold it as cash or stash it in an ultra-safe bank CD—not invest for growth. At this rate, expect more declines in optimism, especially as retirees stuck in cash see further declines in income.

Related stories:

 

MONEY Savings

Here’s the Magic Amount You Need to Retire Happy

Numbers from American paper currency
George Adamson—Getty Images/The Bridgeman Art Library

A financial planner estimates how much money you need to save — and shares 5 keys to a successful retirement.

Most people would say money can buy you happiness in retirement, but financial planner Wes Moss wanted the details: Just how much money does it take to retire happily? And is there a point of diminishing happiness returns on the size of a nest egg?

Moss surveyed 1,350 retirees about net worth and income, assets and home equity. But he wasn’t hunting for the number of dollars it takes to live — rather, he wanted to understand how money correlates to retirees’ levels of happiness. To that end, he posed a series of detailed questions about their lives: where they shop, what kinds of cars they drive, how many vacations they take annually, their family lives and the activities they pursue. Then he associated their levels of reported happiness with their financial condition.

Here’s what he found: Most people can be happy in retirement with savings of about $500,000. A higher number can buy more happiness, but only to a point.

“There is a plateau-ing effect above that number, and the higher you get the rate of increase gets smaller,” Moss says. “I call it diminishing marginal happiness.”

Moss, managing partner and chief investment strategist at Capital Investment Advisors in Atlanta, explores the correlation of wealth and retirement happiness in his new book, You Can Retire Sooner Than You Think: The 5 Money Secrets of the Happiest Retirees. Moss is a registered investment adviser who previously worked for a big Wall Street firm.

His five secrets include a careful determination of what you actually want to spend money on in retirement and how you’ll save to meet your goals; paying off your mortgage early; developing diverse sources of income in retirement; and learning how to invest for income.

Here’s an edited transcript of five questions I asked Moss about his findings in a recent interview.

Q. Who are the happy retirees, and what makes them happy?

It’s not how much you save but how much you save in relation to what you need. When I worked on Wall Street, what we always were trying to breed is an expectation with clients that they need to spend more and more — you need an infinite amount because you will need to spend just as much or more in retirement. That’s what the mutual fund industry and Wall Street preach.

But we found that for most people, the amount of happiness correlates to median savings around $500,000. There are some increases above that number, but it’s a slower rate of incremental gains. So think of $500,000 as a financial bare minimum.

Q. Are the happy retirees making adjustments to their spending in order to be comfortable?

The survey data doesn’t tell me that, but my real-life experiences with clients suggest that people take a realistic look at how much income they’ll have — perhaps they have two or three thousand in Social Security income, and they can take another $3,000 monthly from their investments. They look at that and decide that they can live a good life on $6,000 a month.

Q. What makes retirees unhappy — and how can people avoid winding up there?

Many of the unhappy retirees are still paying mortgages, with no light at the end of the tunnel. Another thing I see a lot is people who don’t take care of big expenses before they retire – they wait to redo the kitchen until they retire because they think they’ll have time to deal with it then. But it’s much better to do these things while you’re working and still have cash flow.

Another mistake is people who don’t have enough core pursuits in retirement. They were too myopic and entrenched in making money and working before, and now they’re not as busy as they need to be. They are blindsided by free time.

Q. I’ve heard both sides of the mortgage-in-retirement argument — some argue it’s better to invest that money rather than use it to pay off a mortgage. Sounds like you’re a firm believer in getting rid of them.

If you have resources in a taxable account, I’d rather see a client use that to pay off the mortgage in one fell swoop — or, just accelerate your monthly payments by $200 to $400, which can shave a full decade off of a mortgage. I know people will argue that they can get a higher return putting that money in stocks, but I’ve seen a lot of periods in my career where all the market did was crash and then recover. Most Americans don’t get that average 9% stock market return over time, so a safer bet is to save that guaranteed 4% or 5% that a mortgage costs. Also, with older clients, what I see is an enormous level of contentment among people who have figured out how to get rid of their mortgages.

Q. Your book lays out a model for retiring early — or earlier than you think you could. That runs counter to much of the talk we hear today about longevity and the need for everyone to work longer. Why do you think people can retire earlier than planned — and how do you define the word “early”?

I define it as being in a position retire at 60 or 62. And there is a group of people where it’s obvious they have the financial means to retire — but the concept is foreign and they don’t have a handle on their finances. I’ve had many client meetings with couples where one spouse thinks they can retire, and the other doesn’t — but when you add up all their different accounts, you see that they have $750,000, along with pensions and Social Security. These are people who definitely could retire if they choose.

MONEY Kids and Money

Go Figure, Grandkids Want to Hear About Your Money Memories

Having seen tough times already, young adults crave money conversations with grandparents who have seen it all before.

What young person doesn’t enjoy a good story? And it doesn’t have to be about vampires or super heroes. The top thing young adults want to hear from grandparents is about experiences and decisions that shaped their life, new research shows.

This is especially true of events having to do with money, according to a survey from TIAA-CREF, a financial firm with $613 billion under management. The finding suggests that grandparents who are willing to talk about their financial follies can play an important role in helping their grandkids learn early to save, manage debt and stick to a budget.

Only 8% of grandparents say they are willing to start a conversation with their grandkids about money, the survey found. Yet 85% of grandkids aged 18 to 24 say they are open to such a conversation. In a further sign of this divide: only 30% of grandparents believe they could have an influence over their grandkids’ money habits; but 73% of young adults say their grandparents already have such influence.

How can perceptions be so different? For one thing, young adults have got the message and are intensely interested in understanding how to manage their money. In the survey, 97% said they were concerned about saving for their future. They see their grandparents as a role model: 59% rated their grandparents as very good or excellent savers.

Grandparents may be missing their influence due to cultural differences, the survey authors say. Many grandparents today are Baby Boomers, the generation that once upon a time didn’t trust anyone over 30. They wonder why young people would listen to them about anything.

But Millennials are coming of age in different times. They embrace the new multi-generational workplace and family. Through the Great Recession, they have seen first hand how tough life can be and they tend to respect elders who have muddled through despite life’s many ups and downs, says Joe Coughlin, director of the Massachusetts Institute of Technology AgeLab, which collaborated with TIAA-CREF on the study.

Coughlin suggests initiating the money conversation with grandkids when they are teens or earlier. Saving for college is a great starting topic. This may require crossing another divide, however. Grandparents are largely in the dark as to how expensive college has become. Four-year university costs easily run to $100,000 and can shoot to $160,00 or more at a private school. Yet one in five grandparents believe the total to be under $50,000 and a quarter believe it to be $50,000 to $75,000, TIAA-CREF found.

In speaking to grandkids about money, the trick is framing the discussion as a personal experience. Kids love to hear stories about rituals, big decisions, frugality and home life, he says. Grandparents can find ideas and conversation starters for teens here and for younger kids here and here.

Taking on this subject can be a fun and rewarding way to get to know a grandchild better—and it may be a huge help to parents. “Life has gotten very busy for dual income households,” Coughlin says. “Grandparents can fill in the gaps. They have the time and the stories to tell.” They just need to understand that, unlike themselves in younger days, the kids will listen.

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MONEY Roth 401(k)

The Great Retirement Account You’re Not Using

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Roth 401(k)s are showing up in more workplaces, but only about 10% of eligible workers saved in one last year. That's a big mistake.

Since they were launched in 2006, Roth 401(k)s have been typecast as the ideal plan for millennials. Paying taxes on your contributions in exchange for tax-free withdrawals, the reasoning goes, is best when your tax rate is lower than it’s likely to be in retirement. It turns out Roth 401(k)s may be the better option for Gen Xers and baby boomers too.

That’s the conclusion of a recent study by T. Rowe Price, which found that Roth 401(k)s leave just about all workers, regardless of age or tax bracket, with more money to spend in retirement than pretax plans do. “The Roth 401(k) should be considered the default investment,” says T. Rowe Price senior financial planner Stuart Ritter.

Yet few workers of any age invest in Roth 401(k)s, which let you set aside $17,500 in after-tax money this year ($23,000 if you’re 50 or older), no matter your income. Just as with a Roth IRA, withdrawals are tax-free, as long as the money has been invested for five years and you are at least 59½. Some 50% of employers now offer a Roth 401(k), up from just 11% in 2007, according to benefits consultant Aon Hewitt. But only 11% of workers with access to a Roth 401(k) saved in one last year. Big mistake. Here’s why:

Higher income. Every dollar you save in a Roth 401(k) is worth more than a dollar you put in a pretax account. That’s because you’ll eventually pay income taxes on those pretax dollars, while you get to keep every penny in a Roth. Granted, you get an upfront tax break by saving in a traditional 401(k), and you can invest that savings. Even so, a Roth almost always overcomes that headstart, the T. Rowe Price study found.

The fund company’s analysis looked at savers of different ages and tax brackets, both before and after retirement. As the graphic shows, a Roth 401(k) pays more even if you face a lower tax rate in retirement than you did during your career. The only group that would do significantly better with a pretax plan: investors 55 and older whose tax rate falls by 10 percentage points or more, which would mean up to 6% less income.

roth edge

Greater flexibility. With a tax-free account, you can avoid required minimum withdrawals after age 70½ (as long as you roll over your Roth 401(k) to a Roth IRA). You can also pull out a large sum in an emergency, such as sudden medical bills, without fear of rising into a higher tax bracket.

Tax diversification. Having tax-free income can keep you from hitting costly cutoffs. For every dollar of income above upper levels, 50¢ or 85¢ of your Social Security benefits may be taxable. “Many retirees in the 15% bracket actually have a marginal tax rate of 22% or 27% when Social Security taxes are added in,” says CPA Michael Piper of ObliviousInvestor.com. And if you retire before you’re eligible for Medicare and buy your own health insurance, a lower taxable income makes it more likely you’ll qualify for a government subsidy. In short, when it comes to retirement, tax-free money is a valuable tool.

More from the Ultimate Retirement Guide:
What Is a Roth 401(k)?
Which Is Better for Me, Roth or Regular?
Why Is Rolling Over My 401(k) Such a Big Deal?

 

MONEY Savings

How to Thrive in Retirement After Falling Short of Goals

Turns out, many retirees don't need as much in savings as they once thought. They are surprisingly delighted with their downsized life and embrace a flexible budget.

Maybe the experts are wrong. Retirement planners say you will need at least 70% of pre-retirement income to enjoy your golden years. Some target as much as 80% or even 85%. Yet recent retirees with less say they are doing just fine, thank you.

Three years into retirement, the average replacement income of people with an IRA or 401(k) plan is just 66% of final pay, mutual fund company T. Rowe Price found. Yet more than half say they are living as well or better than when they were working, and 89% say they are somewhat or very satisfied with retirement so far.

Such findings belie our widely accepted retirement savings crisis. In aggregate, we are way under saved. The average 50-year-old has put away just $44,000. But clearly a large subset—those with either a 401(k) plan or IRA, or both—are doing pretty well. This is the group that T. Rowe Price surveyed by filtering for those retired less than five years or over 50 and still working.

This particular group of savers may want to let up on the handwringing. As recent research by EBRI and ICI show, consistent 401(k) investors (those who held accounts between 2007 and 2012) had balances 67% higher than overall plan participants, reaching an average $107,000.

For years a small band of economists led by Lawrence Kotlikoff, the Boston University economics professor, have been making the case that many people are over saving. Kotlikoff argues that the financial services industry is essentially scaring people into over saving in order to collect fees. The fright factor is evident in the T. Rowe Price survey, where those still at work expressed far more anxiety than those who have reached retirement and found it to be less financially challenging than they may have been led to believe.

Half of workers believe they will have to reduce their standard of living in retirement, compared to just 35% of recent retirees who think that way. More workers also believe they will run out of money (22% vs. 14%), and workers are much less likely to believe they will be able to afford health care (49% vs. 70%), the survey shows.

Recent retirees in this survey have median assets of $473,000. That includes investable assets plus home equity minus debt. Home equity is a big part of their holdings at $191,000. They have just 52% of investable assets in stocks and asset allocation mutual funds, and are playing it fairly safe with 31% in cash.

How are they managing on pre-retirement income that falls short of most planners’ models? A third are working at something or looking for work, and to augment Social Security and pension income they are drawing down their savings by an average of 4% a year, which is a rate that many planners consider reasonable.

But the real source of new retiree satisfaction may be their genuine appreciation for a downsized life: 85% say they do not need to spend as much in order to be happy and 65% feel relieved to no longer be trying to keep up with the Joneses. In addition, they embrace flexibility with 60% saying they would rather adjust their spending to maintain their portfolio than maintain their spending at the expense of their portfolio. With that attitude, almost any retiree can feel good about their life.

Related links:

 

MONEY 401(k)s

Are You a Saver or an Investor? It Matters in a 401(k)

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Fuse—Getty Images

Most 401(k) participants see themselves as savers, new research shows. And it's holding them back.

The venerable 401(k) plan has many failings and is ill suited as a primary retirement savings vehicle. Yet it could do so much more if only workers understood how to best use it.

The vast majority of 401(k) plan participants view themselves as savers, not investors, according to new research. As such, they are less likely to allocate money to 401(k) plan options that will provide the long-term growth they need to retire in comfort.

Only 22% of workers in a 401(k) plan in the U.S., U.K. and Ireland say they are knowledgeable about investing, State Street Global Advisors found. This translates into a low tolerance for risk: only 27% in the U.S., 15% in the U.K., and 10% in Ireland say they are willing to take greater risk to achieve better returns.

This in turn leads to sinking retirement confidence. Only 31% in the U.S., 26% in the U.K., and 16% in Ireland feel they will save enough in their 401(k) plan to fund a comfortable retirement, the survey shows.

The faults of 401(k) plans are well documented and range from uncertain returns to high fees to failing to provide guaranteed lifetime income. Economic activists like Teresa Ghilarducci, a professor of economics at the New School and author of When I’m Sixty-Four, have been arguing for years that we need to return to something like the traditional pension.

But the switch to 401(k) plans from traditional pensions has taken more than three decades. A broad reversal will be slow too, if it comes at all. In the meantime, workers need to understand how to best use their 401(k) or other employer-sponsored defined contribution plan. Like it or not, these plans have become our de facto primary retirement savings vehicles.

At a basic level, plan participants of all ages must begin to embrace higher risk in return for higher rewards. The State Street survey reveals broad under-exposure to stocks, which historically have provided the highest long-term returns. A popular rule of thumb is to subtract your age from 110 to determine your allocation to stocks. But the latest research suggests that even just a few years from retirement you are better off holding more stocks.

There is much more to making the most of your 401(k) plan than just adding risk. You need to contribute enough to capture the full employer match and be well diversified, among other things. But it all starts with understanding that saving in a secure fixed-income product is not investing, and it is not enough to get you to the promised land.

Yes, the financial crisis is still fresh and the market’s deep plunge is an all-too-real reminder that stocks have risk. But just five years later the market has fully recovered, and 401(k) balances have never been plumper. Fixate on the recovery, not the downturn. A diversified stock portfolio almost never loses money over a 10-year period. It took the Great Depression and then the Great Recession to produce 10-year losses, which were less than 5% and disappeared quickly in the recovery.

If you feel nervous about investing in stocks, consider opting for a target-date retirement fund, which will give you an asset mix that shifts to become more conservative as you near retirement. While they may not suit everyone, target-date funds tend to outperform most do-it-yourselfers, research shows. With your asset mix on cruise control, you can focus on saving, which is enough of a challenge.

MONEY Savings

5 Ways to Keep a Crisis From Crushing You

Falling anvil with inadequate parachute
A majority of Americans are unprepared for a financial emergency. Michael Crichton + Leigh MacMill; Prop Styling by Jason MacIsaac

What would you do if you suffered an emergency that's bigger than your safety net? These strategies can cushion the blow.

You’ve no doubt diligently socked away a chunk of cash for a rainy day. But chances are it isn’t enough to keep you from worrying about being swept under by a passing financial storm. In a MONEY survey of 1,000 Americans conducted earlier this year, 60% of respondents said they didn’t feel they had enough emergency savings.

They’re probably right to be ­concerned: A new survey by Bankrate.com found that the majority of Americans making $75,000-plus have less than six months of emergency savings on hand. Meanwhile, experts typically recommend having at least that much and often as much as 12 months’ worth—lofty goals even for those who are otherwise well-off.

While you’re in the process of bulking up your kitty, lessen your anxiety by figuring out how you’d quickly lay your hands on cash if the roof fell in, literally and figuratively. “The goal is to reduce long-term damage to your finances,” says Scottsdale financial planner Brian Frederick. Putting the bills on a credit card can be a reasonable option for those able to pay off their debt in a jiffy, but carrying a balance for longer gets pricey when you’re talking about a 15% interest rate. Instead, keep these five better options in the back of your mind:

1. Crack a CD

In hopes of discouraging customers from fleeing when rates rise, banks have been hiking penalties for tapping a CD before its maturity date—six months’ interest is now common on a one-year certificate, and six to 12 months’ is typical on a five-year. Even so, “the interest is so small these days that a six-month penalty is almost meaningless,” says Oradell, N.J., financial planner Eric Mancini. On a $100,000, five-year CD at 2%, you’d give up just $100.

2. Sell Some Securities

Ditching money-losing stocks is clearly a better move than borrowing, says Frederick, given that you can use losses to offset up to $3,000 of capital gains for this year and carry any overage into future years. Everything in your portfolio on the up and up? While you’ll pay a 15% capital gains tax on the profits from any security you’ve held for more than a year, it might make sense to pare back on winners if your allocation has gotten out of whack.

3. Take Out a 401(k) Loan

Most plans allow you to borrow half your vested amount, up to $50,000, with generous terms: no setup fees and a 4% to 5% interest rate, paid to yourself. Moreover, as long as you keep making contributions, you probably won’t sacrifice much growth. A five-year, $20,000 loan against a $250,000 401(k) would reduce your balance by just $9,000 after 20 years, assuming you continued to save $500 a month during the loan term. But should loan payments require you to pull back on contributions, your nest egg will take a hit (see the graphic). Another risk: If you leave your job for any reason before repaying, you must cough up the entire balance within 60 days, or else you’ll owe income taxes and a 10% penalty on the funds. “You can end up feeling stuck in your job,” says Edina, Minn., ­financial planner Kathleen Longo.

the 20k loan

4. Tap the House

Whether or not you have a home-equity line of credit already, you’ll benefit from today’s low rates. The average on a new line is about 5%, but if your credit is nearly perfect, you can get closer to 3%, with no setup fee, Bank­rate.com reports. Plus, interest payments are usually tax-deductible. The caveats: It may take a few weeks to open a new line. Also, HELOCs are var­iable rate, so your payments may rise if the Fed hikes interest rates. Finally, some banks charge a fee if you close the line early; look for one that doesn’t.

5. Borrow from a Stranger

Those who don’t have adequate home equity can still beat rates on credit cards and personal bank loans by nabbing a loan from a peer-lending site like LendingClub or Prosper. Rates on those sites can be less than 7%, plus an origination fee of 1% to 3%. Peer loans are a good option for those with sterling credit histories, says Steve Nicastro, investing editor at NerdWallet. Check what rate you’d get using the sites’ tools. Look good for you? After you fill out an online form, the sites will take a few days to verify your info, then send your loan out to prospective lenders. Most loans are funded within a week.

More on building a stronger safety net:

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