No, my last name is not Madoff and this is not a Ponzi scheme or infomercial. Mr. GoTo just wants to point out – in very simple terms – that for many baby boomers there are still some options out there for getting a great return on money invested for retirement. Here is my “two step” plan (not to be confused with those goofy “three step plan” commercials that are all over the airways):
Step 2: Designate your contributions and the employer match to a stable value fund.
Simple, isn’t it?
Of course, my two step plan assumes that your 401(k) plan has one of the most typical matching features and that your employer has not stopped matching 401k contributions.
According to a 2007 survey, 24.8% of 401(k) plans have a fixed match feature. Among plans having fixed employer matches, the most popular matching formulas are (a) 50% matching contributions up the first 6 percent of pay; (b) a dollar for dollar match up to the first 4 percent of pay; or (c) a dollar for dollar match up to the first 3 percent of pay. If you have one of these, then my two step plan can work for you. Just calculate how much you need to contribute to capture all of the matching dollars available and make sure you contribute that amount.
The second step is important for the guaranteed return feature of my plan. Most employee-sponsored retirement plans include a “stable value” fund as one of the investment options available to participants. In fact, because of their unique nature, stable value funds are normally available only inside 401k and other qualified retirement plans. They typical return from a stable value fund is only 3-4% but you are assured (mostly) of not losing money. That’s because stable value funds have an insurance “wrapper” that protects and guarantees the asset values. Yes, there is some risk that the insurer could fail but so far that hasn’t happened to any stable value fund that I am aware of.
To see how my plan works with hypothetical dollars, let’s assume you are a baby boomer making $75,000 per year. Your employer will match 50% of your 401(k) contributions up to 6% of your income (the most common formula). So, you contribute $4,500 (6% x $75,000). Your employer matches that with $2,250 (50% of your $4,500). You tell your 401(k) plan administrator to put the total of $6,750 (your contributions plus the employer match) into your plan’s stable value fund.
At the end of the year, you have a total of $6,750 credited to your account, from an investment of $4,500. In fact, you will probably have more like $6950 in your account, assuming a 3% return from the stable value fund. Voila’ – you received a 53% return for your retirement and you assumed virtually zero risk.
Doesn’t that sound better than what so many others have done, which is to stop contributing entirely? Why have they not considered this simple two-step plan?
You can contribute more than the amount needed to receive all of the matching dollars (which is what I am doing), up to the annual 401(k) contribution limits. You can also take more risk and invest in other fund options. Will you earn enough from this plan to pay for your retirement? Probably not – but it sure can help. The point is don’t let an over-reaction to what happened in 2008 cause you to overlook this option for guaranteed investment returns.
Photo credit: T. Al Nakib