Start planning now for 401(k) plan changes in 2004

NEW YORK — If one of your New Year’s resolutions is going to be to save more for retirement, now is a good time to begin planning for it.

In 2004, workers will be able to set aside up to $13,000 in their company-sponsored 401(k) savings plans, an increase of $1,000 from this year. The same limit applies to 403(b) plans for workers in nonprofit organizations and 457 plans for state and municipal employees.

Workers 50 and older can add an additional $3,000 in 2004, for a total of $16,000.

Meanwhile, the upper limit on "SIMPLEs," Savings Incentive Match Plans for Employees, for workers in small businesses will rise to $9,000 in 2004 from $8,000 this year, with a $1,500 "catch-up" provision for those 50 and up.

"These are funded with pretax money, so you’re saving for retirement while saving on (income) taxes," said tax analyst Richard O’Donnell.

O’Donnell, who works at RIA, a New York-based provider of tax information for tax professionals, points out that an added benefit is that your earnings are sheltered, "so you get tax-free growth until you take them out in retirement." And many companies make "matching" contributions of 3 percent or more to 401(k) account savers, further raising a worker’s return.

Just where are Americans going to get the money to increase their retirement funding?

O’Donnell notes that as the economy improves, more workers are getting raises. Many, too, will have higher take-home pay because of the tax cuts passed by Congress last year. And baby boomers who finally have their children through college have the opportunity "to put that money that would have gone toward tuition into their retirement funds," he said.

Do Americans need to save more for retirement? According to two new surveys, the answer is a definite "yes."

A study by the Congressional Research Service found that the median value of retirement accounts in 2001 was $27,000. For workers aged 55 to 64, the median was $55,000, it found.

"For a 65-year-old retiring in December 2003, $55,000 would be sufficient to purchase a level, single-life annuity that would pay $408 per month," the CRS said. That’s not much supplement to a retiree’s Social Security benefit, the CRS noted.

In a second study, the nonprofit Employee Benefit Research Institute in Washington, D.C., determined that U.S. retirees’ income in 2030 will be $45 billion short of what they need to cover basic expenses.

"Most at risk are low-income single women," said the study, which was designed to help state governments project future social benefit needs.

The good news, however, is that many Americans could plug that gap by simply increasing their retirement savings by 5 percentage points, the EBRI study found.

Here’s the math: Start with a worker who has $25,000 saved and earns $3,000 a month. His company matches 3 percent of contributions. If the worker contributes 10 percent of his salary, or $300 a month, and earns 7 percent on his investments, he’ll have a retirement pot of $678,700 in 30 years. But if that worker ups his contribution to 15 percent, or $450 a month, his pot will be $862,000.

Ellen Hoffman, author of "The Retirement Catch-Up Guide," said that consumers can adopt a number of strategies to step up retirement contributions.

"The first thing people have to do is figure out how they’re spending their money," she said. She recommends that families "keep track of every penny for a week or a month" to identify unnecessary expenses — and money that could go into their retirement accounts.

Hoffman also recommends some other relatively painless possibilities: