‘AN AUTOMATIC CURE FOR SPENDING,’ from How to put savings on auto-pilot. Good, simple & practical. DISCIPLINE! GOAL ORIENTED ! SPEND LESS!!!!!!

In Uncategorized on September 4, 2009 at 13:01

The brutal recession is amplifying a longtime concern: Americans don’t stash away nearly enough of their income, potentially leaving many to suffer financially in retirement.

There are glimmers of hope, however. Federal data show the U.S. personal savings rate climbed to 5.2% of disposable income in the second quarter of this year, up from less than 2% in 2007 and 2008. Yet, financial pros say most workers should ideally save at least 15% of their gross income for a secure retirement—often even more.

The Obama administration is concerned about Americans saving too little. President Obama’s 2010 budget proposal would require employers without a retirement plan to set up automatic individual retirement accounts for employees. Companies with 10 or more workers and two years in operation would have to direct-deposit a percentage of each employee’s pay into an IRA unless the employee opts out. Advocates of the plan are hopeful it will bolster Americans’ savings rate and stop the government from having to aid struggling retirees in the future.

“The natural human tendency is to sit back and do nothing,” says David C. John, a senior fellow with the Heritage Foundation, who crafted the idea with J. Mark Iwry, a senior adviser in the Treasury Department. “What automatic enrollment does is take that individual inertia and turn it on its head,” Mr. John says. The plan, he adds, helps people “make the best decision possible by automatically putting them into a set investment program.”

Whether Congress will approve the plan remains to be seen. But in the meantime, there are plenty of ways to start your own automatic savings plan without Washington’s help. Some methods are better than others, though. Here are a few to consider—along with some comments and caveats from financial advisers.

Payroll deductions

Employers, especially larger ones, typically provide a few possibilities. Most common are defined-contribution retirement plans, like 401(k)s, which put savings aside for employees as part of the payroll process. Participants elect a percentage of their salary to set aside, within limits set by the government. The company then takes that amount out of each paycheck and diverts the savings to the employee’s retirement account, which typically features a menu of mutual funds where the money can be invested. Most 401(k) contributions are pretax, so even though they reduce one’s available cash, they also reduce one’s taxable income. Also, many employers match a portion of the employee’s contribution.

“In many ways, the 401(k) is the ideal way to save long term,” says Tim Wyman, a financial planner in Southfield, Mich.

Mr. Wyman says everyone should contribute at least enough to take full advantage of the company’s matching contribution, which is often 2% to 5% of pay. But most people will need to contribute a lot more than that to have enough saved for retirement. Consider bumping up your contribution percentage a little each year, or whenever you get a raise.

Some companies also let employees use payroll deductions to buy company stock, sometimes at a discount of as much as 15%—a nice incentive. One potential hitch: The shares could tank after being purchased. The only way to guarantee a profit is to sell the shares as soon as they are granted. Also, if you hold a lot of company stock long term, both your investment portfolio and your career could take a beating if the company runs into financial problems.

Another possibility for some people is to use a so-called health savings account, or HSA, as a potential piggy bank for retirement. Employers with high-deductible medical plans often offer employees the option of funding HSAs. These accounts let employees save pretax money for health-care costs that won’t be covered by their medical plan. Unused amounts can continue to grow over time and can be withdrawn penalty-free in retirement, potentially augmenting other savings.

HSAs are also an option for people who aren’t employed. But you must have health insurance with a high deductible to qualify.

Automatic investing in funds

Automatic investing through a mutual-fund or brokerage company is a good substitute if an employer-sponsored retirement account isn’t available.

Someone who’s already managing to save can schedule regular electronic transfers from a bank or credit union to mutual funds that he or she selects. Investment companies that offer this service have different rules, but taxable accounts, IRAs or 529 college-savings plans can receive such transfers. Transfers also can accumulate as cash in an account for investing later.

It’s a good idea to compare fees and rules at each company. T. Rowe Price Group Inc. (TROW), for instance, waives minimum investments in funds for participants in its automatic-asset-builder plan, but not all companies do. T. Rowe Price does require a $50 minimum monthly deposit.

American Century Investments allows automatic transfers and investments of as little as $50 as long as they total at least $600 a year. But the initial minimum investment for most American Century funds is $2,500. For its LiveStrong and One Choice funds, targeted to an investor’s expected retirement date or risk tolerance, the minimum is $500 as long as the customer transfers at least $100 a month to the account.

Fidelity Investments waives minimum investments on many of its funds for automatic investors but requires transfers of at least $100. The transfers can be monthly, quarterly or on a more customized schedule. There are no fees for transfers to a Fidelity account, but investing in some non-Fidelity funds costs $5 per transaction. The usual transaction fee for buying those funds online is $75, according to the Fidelity fee schedule.

Vanguard Group Inc., meanwhile, requires at least a $3,000 initial minimum investment in most of its funds that allow automatic transfers and investing.

Many online brokerages that specialize in buying exchange-traded funds or an array of other investments also offer automatic transfers. However, there are considerations: ETFs don’t carry the minimum investment limits like funds generally, but brokerages often charge a transaction fee for every investment. So it might be worth accumulating a big amount of savings in the plans before investing, rather than automatically investing each deposit., for instance, offers automatic investing in ETFs or individual stocks and charges $1 to $4 per investment, depending on the pricing plan the investor chooses.

Racking up rewards

Another option is to use a cash-back-rewards credit card. How they work: A percentage of spending on the card is refunded each month or periodically. The refunds can help pay off the card’s balance, or be paid directly to the cardholder.

Using cash-back cards to bolster savings, however, generally only makes sense if you pay the full balance every month. Fees and higher rates can offset any cash rewards for those who carry balances or have trouble managing their payments.

Some cards deposit the rebate directly into a brokerage account. Visa Inc. (V) and Charles Schwab Corp. (SCHW) offer the Schwab Bank Invest First Visa, which gives a 2% refund on purchases. The refund is deposited monthly in the cardholder’s Schwab One brokerage account, where it can be used to invest. Schwab waives a $1,000 minimum balance on the accounts for Invest First Visa cardholders.

American Express Co. (AXP) and Fidelity offer Fidelity Retirement Rewards, Investment Rewards and 529 College Rewards cards that provide 2% cash back on all card spending. The money is automatically swept into a corresponding Fidelity brokerage account. (The Retirement Rewards card, for instance, sweeps the money into a traditional or Roth IRA, while the 529 College Rewards is linked to a 529 plan.) The rebate can be swept into the Fidelity account once the cardholder has spent $2,500, or racked up at least a $50 refund.

The Schwab Visa and Fidelity Amex cards have no annual fee and have no limit on the annual cash rebate they award.

Some cards specialize in rebates that are swept into 529 college-savings plans. Upromise cards, for instance, from a unit of student-loan provider SLM Corp. (SLM), provide a 1% rebate on most card purchases—with 10% rebates on certain grocery and drug-store purchases and 2% on gas. The card sweeps each refund into a Upromise member’s college-savings account. The maximum annual rebate is $300.

Tax withholding

Some people ask their employers on Form W-4 to withhold more tax from their pay as a way to ensure they get a big income-tax refund.

That’s not an ideal savings strategy for most people. “It’s basically giving an interest-free loan to the government,” says Jacob Gold, a financial planner in Scottsdale, Ariz. He generally advises people to adjust their withholding so that they don’t owe more on April 15. Then, if you reduce your withholding as a result, instead of spending the additional cash, consider redirecting it to an automatic investing plan or 401(k) contribution.

Home mortgage

Some real-estate agents and mortgage brokers tout home ownership and paying down a mortgage as an ideal way to systemize savings while building up equity in real estate.

But while homes can be wealth builders and smart for those who plan to live in a house a long time, some financial advisers still argue that stocks generally offer higher returns in the long term. Kathy Longo, a financial planner in Edina, Minn., says recent housing-market troubles show houses aren’t liquid investments that always produce generous returns. Many people got into mortgages they couldn’t afford, she says, leaving them buried in bills they couldn’t pay, with the risk of losing everything in a foreclosure.


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