Ask Liz Weston

Get smart with your money

Q&A

Why company 401(k) matches matter

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Dear Liz: As a CPA financial advisor to individuals and small businesses, I devour your column. It’s almost always spot on. But the first sentence of your advice to the person whose 401(k) doesn’t offer a match — “start looking for a better job” — was not, and you missed an opportunity to educate your readers in how to compare job compensation.

I encourage my small-business and wage-earning clients to adopt a “total compensation” view to evaluate labor costs and to talk wages with their employees or employers. Employer A offering $100,000 might be better, worse or equal to Employer B offering $70,000 plus retirement plan match and, more importantly, employer-subsidized family health insurance. Besides the intangible factor of job satisfaction, one just doesn’t know which employer’s total financial compensation is “better” without crunching the numbers before and after tax. The two companies might be different only in philosophy of how compensation is paid, not better or worse.

Answer: Some jobs come with pensions or pay so good that the lack of a company 401(k) match is all but irrelevant. It’s safe to say those jobs are not in the majority. The median full-time wage at the end of last year was under $44,000, which means half of all workers earned less. Given stagnant incomes and rising costs, many workers have a tough time saving, so the extra help provided by a company match can make a world of difference in their ability to achieve a comfortable retirement.

Nine out of 10 employers that have a 401(k) offer a match, according to PlanSponsor.com, so plans that don’t are definitely outliers. The most common match is now 100%, or one dollar for each dollar contributed, up to 6% of the worker’s salary, according to the most recent Aon Hewitt study. Nineteen percent of the employers surveyed offered this match, up from 10% in 2011. The most common match used to be 50 cents for each dollar contributed up to 6% of salary.

Clearly, more employers are getting the message that good company matches are an excellent way to signal that they care about their employees’ futures.

Baby coming? What to consider before you quit

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Dear Liz: My husband and I have decided that next year we want to have a baby. So we have at minimum a year and nine months to make sure we’re financially prepared. I did some cursory Googling and I’m already a bit overwhelmed. I’m not sure where to start.

I know I should figure out how much the medical costs will be, but how do I figure out how much everything else costs? Do you have a checklist of things we should be aware of and consider? One thing I could use some guidance on is whether I should stay home or put our baby in daycare so I don’t miss out on work benefits like healthcare and 401(k) matching. I like my job and bosses, and if I leave I will have to find a new job that may not be as good when I decide to reenter the workforce. But if we decide to have a second child, I’m worried that childcare costs will be too much for two young children. Know of any good books on this subject?

Answer: By leaving work you wouldn’t be missing out only on benefits. Research by economist Stephen J. Rose and Heidi I. Hartmann, president of the Institute for Women’s Policy Research, found that women’s average annual earnings decline 20% if they stay out of the workforce for one year and 30% if the absence stretches to two or three years. Many find it tough to rejoin the workforce after extended absences.

Quitting work is the right choice for some parents, but you shouldn’t do so simply because you fear childcare costs. For a few years, those costs might eat up most or all of your paycheck, but such expenses decline over time. If you continue to work, your earning power and retirement contributions will continue to grow.

Meanwhile, some parents find they can reduce childcare costs by staggering their work schedules, tapping family members or sharing a nanny. Research the childcare options in your area so you have an idea of what’s available and the costs.

You can continue your research into budgeting for a child with the excellent, constantly updated book “Baby Bargains” by Denise and Alan Fields. This field guide offers product reviews and realistic assessments of what you actually need to buy for your child and what you don’t.

Another good resource is financial writer Kimberly Palmer’s “Baby Planner,” available on Etsy.

With all your planning, keep in mind that parenting always presents surprises. You may decide to stop after one child or keep going until you have a houseful. The important thing is to remain flexible and don’t assume you know how your future self will choose to live.

One of the best pieces of advice in Facebook Chief Operating Officer Sheryl Sandberg’s bestselling book, “Lean In,” is that women not cut themselves off from career opportunities because of how hard they think combining work and child-rearing will be. “What I am arguing is that the time to scale back is when a break is needed or when a child arrives — not before, and certainly not years in advance,” she writes.

Find a better credit card

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Dear Liz: One of my credit cards offers mediocre rewards — mainly an online store where I can use points to buy products I don’t really need. I would like a card from the same company that offers better rewards, but this is my oldest credit card and I don’t want to hurt my credit score by closing it. Should I just open a new card and use this one sparingly? Can I call the company to seek better rewards without closing the account? Thanks for any help you can offer.

Answer: If you have plenty of other open accounts, don’t be afraid of closing one occasionally. Most credit issuers continue to report the details of closed accounts to the credit bureaus for years, so your good history with this card will continue to contribute positively to your scores even if you close the account.

With that in mind, you can call the issuer and ask for a better deal, which will usually mean opening a new card. You also can shop for new cards at one of the many card comparison sites, such as NerdWallet, Cardratings.com or Creditcards.com.

Who should save 10%

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Dear Liz: I often hear financial planners say you should save 10% of your income, but they don’t go into exactly what that means. Is that 10% separate from retirement or including retirement? Does that include saving for your emergency fund? Is this just archaic advice now? I’m 46 with only $40,000 saved for retirement so I’m in the panic mode that I will never be able to save enough for retirement.

Answer: Saving 10% for retirement is often considered a minimum for those who start saving in their 20s. The older you are when you begin, the more you’d need to save to match the nest egg you would have accumulated with an earlier start. That means saving 15% to 20% if you start in your 30s, 25% to 30% if you start in your 40s, and 40% of your income, or more, if you don’t start until your 50s.

Clearly, the wind is at your back when you start saving young. It starts blowing pretty hard in your face if you wait.

If you can’t carve out a huge chunk of your income for retirement, though, you shouldn’t despair. Save what you can, as anything you put aside will help supplement your Social Security checks. You may find that your expenses drop substantially in retirement, particularly if you have a mortgage paid off by then, so you won’t need to replace as much income as you think.

Another technique for coping with a late start is to work longer. That gives you longer to save, but it also allows your savings — and your Social Security benefits — more time to grow. You will be able to claim early Social Security benefits at 62, but you’ll be locking in a smaller check for life. It’s usually better to wait until your full retirement age, which will be 67, to begin benefits, since each year you wait adds nearly 7% to your check. If you wait three more years, until age 70, your check would grow by 8% each year. That’s a guaranteed return unavailable anywhere else.

One way around early withdrawal penalties

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Dear Liz: My son is 52 and has been unemployed for three years. He has been forced to withdraw money from his 401(k) and pay early withdrawal penalties on it to pay his mortgage and other bills. Is there such a thing as a hardship exception to avoid this tax bill?

Answer: There’s a way to avoid the 10% federal penalty, but not income tax, on early withdrawals from retirement accounts when someone is under 591/2 (the usual age when penalties end). The distributions must be made as part of a series of “substantially equal periodic payments” made using that person’s life expectancy. When these distributions are taken from a qualified retirement plan, such as a 401(k), the person making them must be “separated from service” — in other words, not employed by the company offering the plan.

Your son wouldn’t be able to withdraw big chunks of his savings, however. Someone his age who has a $100,000 balance in a retirement plan could take out about $3,000 per year without penalty. Revenue Ruling 2002-62, available on the IRS site, lists the methods people can use to determine these periodic payments. If he might benefit from this approach, it would be smart to have a tax pro review his calculations.

Why you want an emergency fund

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Dear Liz: I regularly read about people in your column who don’t feel the need for an emergency fund, or think they only need a small one. This is one of the many issues that makes me glad that my husband takes care of the finances. We are both professionals with graduate degrees who, for different reasons, were once unemployed for three months at the same time. Because we had a healthy emergency fund, we kept up with our bills with only minimal belt-tightening. If I had been in charge we would have had to flee the country to escape our creditors! That’s an exaggeration, but you get my point.

Answer: Kudos to your husband for being prudent, and to you for cooperating with him.

For most families, growing a fat emergency fund necessarily must take a back seat to more important priorities, such as saving for retirement and paying off toxic debt, including credit cards. As soon as they’re able to add to their emergency savings, though, they should do so. The average duration of unemployment stretched over five months after the recent recession. Although you may be able to live off credit cards and lines of credit, using cash is obviously better — and having that fat emergency fund can help you sleep better at night.