Play Catch-Up to Make Up for Nest Egg Losses

The combination of stock market losses and company cutbacks can derail your retirement savings unless you take immediate action to get back on track (ljworld.com April 29).

Companies of all sizes are slashing expenses to try to keep from laying off workers during the recession. Job benefits increasingly are targeted as a way to cut costs, and the long-term implications on your nest egg could be significant.

For example, if your employer discontinues the 50% match of your 401(k) contributions to up to 6% of your $75,000 salary, you'll lose $2,250 in savings in one year. And assuming a 7.2% average annual rate of return, that $2,250 yearly contribution would have grown to $100,000 in 20 years from compounded growth (Bankrate.com March 16).

If you experience a loss or reduction in workplace retirement benefits, consider a combination of moves to soften the blow:

• Beef up 401(k) savings. Don't let the loss of a company match--on top of rising expenses--keep you from forging ahead. Research from Hewitt Associates revealed that the average employee could bridge the gap caused by a 401(k) match suspension by increasing contributions just three percentage points a year (U.S. News & World Report April 14). Also, consider switching to a lifecycle fund, which automatically adjusts to less risky investments as you approach retirement age.
• Redirect spending leaks to personal savings. If you don't have an emergency fund, start one now, particularly if your job is in jeopardy. Keep three to six months' living expenses in a liquid, interest-bearing account in case you need the money quickly. Once you have a solid emergency fund as back-up and you're contributing as much as you can to your 401(k), consider an IRA (individual retirement account). A traditional IRA gives you an immediate tax deduction if you meet income requirements; a Roth IRA is funded with after-tax contributions and allows you to take tax-free distributions in retirement. Know the income limits for both.
• Resist the urge to cash out. Fidelity estimates that if you're in the 25% federal tax bracket, a $50,000 withdrawal before age 59 ½ will cost you $12,500 in federal taxes, $3,500 in state taxes (assuming a 7% state tax rate), and $5,000 because of a 10% early withdrawal penalty. Your $50,000 withdrawal from retirement savings shrinks to $29,000. According to Hewitt Research, 45% of employees make the costly mistake of raiding their 401(k) when they leave their job. (If you are terminated, there's an exception to the penalty if you are 55 or older in the year you're terminated.)
• Revisit your retirement goals. In light of lower balances and economic uncertainties, rerun the numbers. Use several retirement calculators to analyze your situation and determine how much more you need to save to meet your goals. Check out BallparkEstimate.org and Bankrate.com (click the Retirement tab then scroll to Calculators).

If your employer terminates your 401(k) plan due to bankruptcy, merger, or acquisition, remember that any pre-tax contributions you made--plus earnings--are yours to keep. Whether you're entitled to the employer contribution portion, though, depends on the company's vesting schedule.