Don't Crack your 401(k) Nest Egg

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Posted on 4/11/11 by Bryan Keithley · Comments

Ever since Congress added subsection k to section 401 of the Internal Revenue Code in 1980, the 401(k) retirement account has become the primary savings source for many Americans. And the baby boomer generation—all 77 million of them, who are just now beginning to enter retirement age—is the first generation for which the 401(k) forms a crucial piece of the retirement puzzle.

Unfortunately, the 401(k) came late for baby boomers—loosely defined as those born after the close of World War II and into the early 1960s. Even if a person born in 1946 started putting money into their new 401(k) plan when the plan first appeared in 1980, they would have begun at age 34, which is a little late to enjoy full compounding of the money by age 65.

Add to that the fact that most people simply don't stow away quite enough cash on a consistent basis to maintain their standard of living in retirement from a 401(k) alone, and you have a potential crisis. But if you're a baby boomer nearing retirement, and you haven't quite saved enough, there are still some things you can do.

Delay getting Social Security. It's awfully tempting if you're 62 to begin taking benefits—it's money you worked all your life for and you deserve it, right? But if you take benefits early, you'll be hit with a penalty, and you'll only earn about 75% of what you would if you waited until age 65.
Consider part-time employment even past 65. The baby boomer generation is changing all the rules about what it means to grow old. And with increasing life expectancy and better health care, more seniors can remain active and employed longer than ever before.
If you switch employers, roll your 401(k) over. Don't let a new job be an excuse to stop saving. Besides, keeping your 401(k) makes it easier to keep track of your retirement savings.
Always pay the minimum amount necessary for the maximum match of money by your employer. Company-matched funds is bonus money that would be foolish to pass up.
Develop a strategy to pay off credit card debt, medical bills, your children's education loans, predatory “payday”-style loans, and any other similar debt prior to retirement. Debt with high rates of interest is obviously the worst kind of debt—it digs a hole that's often very difficult to escape from—and this debt should be your priority.
Also, don't withdraw from your 401(k) early. Just like with Social Security benefits, withdrawing early simply means less money over the long-term, as the money will now not be accumulating interest. You might even be paying more by way of penalties or more taxes to Uncle Sam.

Sticking to these 6 strategies will allow you to make the most of your 401(k) and to max out your retirement income regardless of when you started saving.

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