Tough Times, Tough Measures
by Robert Powell
Wednesday, May 21, 2008
provided by MarketWatch.com


Tempted to pull money from your 401(k)? Consider these other strategies first

Times are tough for boomers and their parents, some of whom are taking drastic steps to deal with the economic downturn, according to a new survey from AARP.

One in four middle-aged (45+) and older workers say they postponed plans to retire due to economic conditions. Almost 25% of people aged 45-to-64 surveyed said they are prematurely taking money out of their 401(k) and other investments. And young boomers are reportedly postponing paying bills and even cutting back on medications.

Before taking such drastic measures, consider these strategies to weather the current storm:

Bring Lunch

Workers should examine their entire financial situation and look for areas first where they can trim expenses, said Christine Fahlund, vice president and senior financial planner at T. Rowe Price Group Inc. "Many of these will be regular, daily or weekly purchases that look small but add up to a significant amount over time," she said. For instance, buying a $5 to $10 lunch every day could add up to $100 to $200 per month.

Two wages are better than one

If possible, Fahlund recommends workers consider finding a second job. "It may be that you are married and only one spouse is currently working," she said. "Perhaps the unemployed spouse can find a way to work at least part-time to help support the family. If there are teenage children at home, ask them to pitch in, too."

Return to Retailer

Fahlund recommends that those considering a purchase wait a day or two to see if it still is top of mind. "Many times, purchases seem to be important, but a short period of time later you forget about them," she said. Also, she recommends consumers throw away catalogs when they arrive in the mail and unsubscribe to email solicitations.

Don't Shop Until You Drop

For those who can't stop their impulse to shop, regardless of their actual financial situation, Fahlund offered this advice: "Consider carefully saving the receipt after your spree and returning the majority of the items within a few days," she said. Better yet, find other things you can do with that time, like volunteer at a food bank or mentor a young girl or boy who needs you.

Keep on Contributing

No matter one's financial hardships, Fahlund says workers should continue contributing to their 401(k) plan. If money is really tight, workers could reduce how much they contribute, but still keep it high enough to get the company match. Also, "if you are very close to retirement, additional contributions to your retirement plan will not have a large impact in your projected income from investments in retirement," she said. "Therefore, if you are tight on funds, contribute enough to get any employer match but focus on the benefits of delaying your retirement date until you are on your feet again."

Retirement Accounts Aren't Rainy-Day Funds

Workers should avoid tapping their retirement account as if it were a rainy-day fund. "Whatever you do, if you are not yet retired, do not permanently withdraw assets from your retirement plan accounts, paying taxes and possible penalties now," she said. "This would be a terrible mistake that you would live to regret later in your life."

Delay Retirement

Workers who are currently employed and considering retiring soon should delay their retirement date if at all possible. "Every year your employer pays you is a year you don't need to cover your own expenses, and another year your retirement nest egg can grow and compound," she said.

Delay Social Security

Workers and retirees should also delay taking Social Security for as long as possible, too. That way, workers can take advantage of the delayed retirement credit. "Payments will increase significantly the longer you wait," she said.

Worst Case

In dire cases where it's just not possible to spend less or it's just not possible to work extra or longer, then the only alternative is for workers and retirees to seek assistance from family, community, and government, said Rande Spiegelman, vice president of financial planning, Schwab Center for Financial Research.

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