When Your 401(k) Isn't Enough.

Only one in 10 people are properly preparing for retirement. Here's how to make sure you're on track.

WHEN IT COMES TO SAVING FOR A FINANCIALLY future, Adrienne Livingston knows that making a plan is half the battle. The 27-year-old was forced to look elsewhere for investment options because her 403(b) (the equivalent of a 401(k) for employees of nonprofit organizations) offers just one fund option. And her company, Portland-based Black United Fund of Oregon, a philanthropic organization that aids low-income communities, matches just 2% of employee contributions.

"Part of my position [as director of major and planned gifts] includes educating the African American community about creating wealth for self as well as community," says Livingston. "So last year I organized a financial planning seminar." What she learned from it prompted Livingston to get her own retirement planning into gear.

Anyone hoping to truly enjoy their golden years should follow Livingston's example. In 1999, fewer than one in 10 people were doing an adequate job of planning for retirement, according to Washington, D.C.-based Employee Benefits Research Institute. This is a big mistake, because when it comes to retirement, a little planning goes a long way. According to EBRI, folks who take the time to figure out how much money they want to save for their golden years go on to save five times more than those who save haphazardly.

While employer 401(k) plans have spearheadeed many Americans' retirement saving, relying on them as your sole investment vehicle can get you into financial hot water--particularly if your plan is limited to company stock or a handful of mutual funds with similar objectives. Retirement planning is a much more comprehensive puzzle, with pieces that include an emergency fund, IRAs and a diverse investment portfolio. Yes, putting together your own plan requires more time and elbow grease, but meeting your financial goals and securing your retirement are certainly worth it.

EYES ON THE PRIZE 

Before you crunch even one number, though, decide exactly what you're saving for. "When Adrienne initially set up her investments, she didn't have a clear idea of her goals," says Patricia Stallworth, a financial educator whom Livingston met at the financial seminar. Stallworth, founder of her own Portland-based company, MoneyStrategies, and author of Minding Your Money (Book Partners Inc., $14.95), says, "The first thing I tell my clients to look at is what they're shooting for--what goal they want and when they want to get there. Then we match their goals with their risk tolerance, and let the investment choices come from that." In Livingston's case, those goals include buying a home and one day opening a consulting firm for organizations and nonprofit agencies--and ultimately a secure retirement.

It's important to establish for yourself the age at which you'd like to retire, so you can calculate how many years you have to save. You should also estimate how much post-retirement annual income you'll need. According to the 1999 Retirement Confidence Survey of Minorities, 51% of African American households have not calculated how much money they must save for retirement. Andrew Burleigh, a Gardena, California-based financial advisor who has spent decades helping his clients prepare for retirement, says a reasonable approximation is 80% per year of the income you had during your peak earning years. When you multiply your yearly income estimate by the number of years you have until you retire, you'll have a pretty good idea of just how large a nest egg you need.

For more help, fill out the retirement planning worksheet in the BLACK ENTERPRISE Wealth-Building Kit (call 877-WEALTHY toll free or log on to www.blackenterprise.com for your copy), or try an online retirement calculator such as those at www.quicken.com, www400.fidelity.com or www .asec.org, the site of the American Savings Education Council.

THREE-LEGGED STOOL

Most Americans will depend on three things to fund their retirement: Social Security, an employer savings plan and their own savings and investments. The first pillar, Social Security, is plagued by problems. According to the RCS Minority Survey, 62% of African Americans say they began saving because they felt they can't count on Social Security. However, it's unlikely that the system will be completely dismantled, and most of us will receive a monthly check. For an estimate of what your monthly Social Security payments will be, based on your employment history, complete a form on the Social Security Administration's Website at www.ssa.gov.

Replacing old company-funded pension plans, 401(k) plans are the second leg of the retirement savings stool. In 2000, employees can contribute up to $10,500 to their 401(k) accounts each year. Contributions are made before taxes, so they'll reduce your annual income tax bill. Many companies--particularly larger ones-sweeten the pot by matching employees' contributions. Matching amounts vary considerably, but average about 50 cents for every dollar, according to the management consulting firm Hewitt Associates in Lincolnshire, Illinois. That free money, combined with the tax advantages and the regular contributions, make 401(k)s an almost unbeatable way to save for retirement--that is, if you have a good plan.

Although the federal government has general guidelines for 401(k) plans, companies have some leeway in creating them, so the quality of plans varies widely. A good chunk of companies, particularly small or new ones, fail to offer matching contributions. Others make the match in company stock. That's great if you happen to work for Microsoft or Cisco, but in most cases, owning too much company stock leaves you vulnerable to the fate of one company and hurts your portfolio's diversification. Most 401(k)s also have vesting periods--the length of time you must participate in the plan before becoming eligible to retain matching contributions--that may be as long as six or seven years.

By far the biggest drawback to some plans is the lack of diversity among their investment choices. Typically, the choices are from a single fund "family" such as Fidelity Investments or T. Rowe Price. You may, for example, want to invest in small-cap or international stocks, and your plan may only include large-cap domestic stock funds. And some plans only offer funds that are underperformers in their class. (You can see how a fund's return stacks up against a benchmark of its peers at www.barra.com). When evaluating your company's plan, consider the investment choices, vesting period, whether the match is made in cash or company stock and the size of the match. To give you an idea, 32% of employers match at least 50 cents on the dollar, according to Hewitt.

If you have a good plan that matches at least some portion of your money, contributing to it is the first thing you should do when saving for retirement, says Michael Buccolo, director of equity marketing at New York-based AXA Advisors. At the very least, put enough money in each year to earn the match. Even though Livingston's 403(b) currently offers only one fund, Stallworth recommends that she stay in it. "You get double savings: it's pretax money that grows tax-deferred."

"Unless your plan is absolutely terrible, I can't think of anything more favorable to investors," says Toian Bowser-Alexander, a certified financial planner with Financial Network Investment Corp. of Pasadena, California. "Even if you have three options, and they're all index funds, you put in $10,000, you reduce your taxes and your employer matches 5% or 6%."

Once you've worked your 401(k) as best you can, it's time to tackle the third leg of the stool, your self-directed savings.

FIRST THINGS FIRST

With this component, it's important to walk before you run. Bowser-Alexander stresses the importance of first building an emergency fund. "You don't want to have to use your credit cards if the car breaks down," she says.

Livingston is in the process of shoring up her just-in-case fund. "I'm looking at a money market account at my credit union for three to six months' worth of emergency funds," she says. She also plans on purchasing disability insurance.

Livingston recently got started on her savings plan by contributing to a Roth IRA. Unlike 401(k) accounts, which generally require you to invest sin mutual funds, IRAs allow you to put money in any vehicle you choose, including funds, individual stocks, bonds or even unit investment trusts. But contributions to tradition: al and Roth IRAs are limited to $2,000 a year, far less than the amount you can put in a 401(k).

Contribute to a traditional IRA, and your money will grow tax-deferred. You may begin making withdrawals at age 59 1/2 (early withdrawals will be hit with stiff penalties) and must take distributions by 70 1/2. If you work for a company that doesn't offer a retirement plan, you can get a tax deduction for your contribution.

But for many investors, particularly younger ones like Livingston or those who don't need the immediate tax deduction, a Roth IRA may be a better choice. Contributions, again limited to $2,000 a year, are made with after-tax money, but that money grows tax-deferred and will not be taxed when you withdraw it after retiring. What's more, Roth IRAs are more flexible about early withdrawals and can more easily be passed along to children or other heirs. However, to qualify for a Roth, a single person must have an adjusted gross income of less than $110,000 and a married couple less than $160,000.

Which IRA is right for you? There's no cut-and-dried winner, but Buccolo is among those experts who lean toward the Roth. "If you qualify, and you don't need the write-off, it's more flexible about withdrawals and it's tax-free," he says. (For more on traditional vs. Roth IRAs, see "Last-Minute Tax Savers," February 2000.)

If you're one of the growing number of Americans hatching your own company or working as an independent contractor, you have several other account choices. (See "Options for Entrepreneurs" on www.blackenter prise.com.)

THE NEW ANNUITIES

Once you've maxed out your 401(k) and IRA contributions, you may want to consider an annuity. Annuities are contracts sold by life insurance companies that invest your money and stipulate a specific annual income after retirement. Annuities come in two flavors: fixed and variable. A fixed annuity, the more conservative choice, has a set rate of return; a variable annuity, which is invested in stocks or other vehicles whose returns can go up or down, has a fluctuating rate of return.

Contributions to annuities are tax-deferred, and--unlike all other accounts--are unlimited.

Sound good? They can be, but "they come with internal expenses, and you're trading maximum growth [as from an equity mutual fund] for guaranteed income," says Bowser-Alexander. Annuity fees range from a surrender charge of as much as 10% of your principal if you want to cash out early (plus a 10% tab payable to the IRS if you do it before age 59 1/2) to annual maintenance fees of $25 to $50. To win over investors who prefer mutual funds with low fees, insurance companies have begun to add bells and whistles such as sign-up bonuses of 3% of your principal and guaranteed minimum death benefits.

Consider an annuity, says Burleigh, "if you're an investor who has already contributed to other accounts, or if you feel comforted by the idea of a predictable income stream after retirement."

PUT YOUR MONEY IN THE MARKET

When it comes to selecting investments for your retirement accounts, a common mistake is playing it too safe. "I'm a firm believer in equities," says Buccolo. "People need to have that growth if they want to beat inflation and have enough to live on."

Bowser-Alexander concurs, and for this reason she doesn't recommend traditional asset-allocation models. "Typically they include cash equivalents and bonds," she says. "Cash belongs in your personal account, and I only recommend bonds if they're in a balanced fund. Most people planning for the long term need growth, not income."

Long-term growth is exactly what Darryel Boone, 25, has in mind. Boone is currently in a Catch-22 situation with his 401(k). He still has funds in the plan of his former employer, the credit card division of a major financial services company, but he doesn't want to roll over the funds to his new employer, "because I'm not sure I'll be staying much longer." Boone has entrepreneurial aspirations and is laboring to get his fledgling independent record label, Products of Tha Streets Ent., off the ground.

So he's taken matters into his own hands by investing in the Alger Capital Appreciation fund, the goal of which is--no surprise here--long-term growth. As of year-end 1999, the fund's Class B shares had a three-year annualized return of 41.86%--and Boone's initial investment of $575 has grown to over $1,800.

"I started contributing to outside investments [in 1996] while I was at my previous job," says Boone, "because I couldn't get into the 401(k) for a year and the choices were limited to company stock" Besides his mutual fund, Boone's other holdings include stock in the company G-III Apparel Group, which sells clothes over the Internet, a medium he's quite comfortable with in his current position as an assistant editor with consumersdigest.com. He's about to buy into the penny stock TeleServices Internet Group which provides telecommunications and Internet solutions to domestic and international companies. Boone is also planning to invest in the Janus Worldwide fund.

One thing Boone isn't doing right now is making monthly contributions to his investments, which would give him the benefit of dollar-cost averaging. "I'm trying not to spread myself too thin until I have the right mix of blue chips, foreign stocks, precious metals and tech; I don't want to start the $25 a month for Alger until I'm better diversified."

It's essential to answer the question of how to spread your money before you begin dumping funds into the market. Begin with this guideline: subtract your age from 100 and invest the resulting percentage in equities. If you're 35 years old, for example, that means 65% of your money should be in equities, and the rest in bonds or cash investments. Tweak that to fit your personal situation and your risk tolerance. (For more on growth vehicles, including ones with low minimum investments, see "The Feminine Mystique" in this issue.)

In your equity fund mix, Bowser-Alexander recommends putting the most money in U.S.-based large companies, then adding some sector funds--"obviously, right now, tech as well as healthcare"--and international funds. (For a list of last year's top-performing mutual funds, see "Charting Your Course," April 2000, or log on to www.blackenterprise.com.) She also recommends paying attention to a fund's inception date and the tenure of its manager. "I usually look for a fund to be around at least 15 years and a manager that's been with it for 10."

The bottom line is to remember that you'll need to fund a retirement that may span 20 or 30 years. "Retirement investing has to be done with the long-term in mind, even in your 60s," says Buccolo. "Nowadays, some people are retired longer than they've worked."

Retirement-saving guidelines at a glance

* Emergency fund: Most experts recommend a stash of six to nine months' worth of living expenses in a liquid account, such as a money market mutual fund.

* IRAS: In most circumstances you can contribute up to $2,000 in pre-tax money to a traditional IRA, which will be taxed at withdrawal, or the same amount in after-tax money to a Roth IRA, which will not be taxed upon withdrawal.

* Annuities: This insurance product guarantees a steady income stream in retirement but often entails high fees and stiff penalties for cashing out early. To do your own research, see www.annuitiesonline.com.

* Mutual funds and stocks: Most experts recommend a portfolio weighted for growth, with the remainder in cash equivalents and bonds. For a rough estimate, subtract your age from 100 and invest the resulting percentage in equities.

RELATED ARTICLE: Now, thousands of choices

Sometimes it pays to make some noise. Employees have been clamoring for more investment choices in their 401(k) plans--and companies are starting to listen. The newest twist in 401(k)s is the self-directed brokerage window, which allows account holders to invest not just in mutual funds but also in individual stocks. Although fewer than 10% of companies now offer the brokerage window option, that number is expected to grow quickly, according to Cerulli Associates, a Boston-based financial research company. The major plan providers--Charles Schwab, Fidelity and T. Rowe Price--are making the option available to companies that sign up with their plans.

Here's how it works: employees can choose to invest a portion of their account in stocks and leave the rest of their account in mutual funds. They then set up a brokerage window account with a participating broker affiliated with their company's plan, and can begin buying and selling stocks just as they would with any other brokerage account.

Some brokers require a minimum investment, usually around $2,500, and all charge a onetime fee (ranging from $50 to $100) for using the option. Of course, commissions are also applied to every trade. Just as mutual fund earnings in your 401(k) are tax-deferred, any earnings on stocks in your account will not be taxed until you withdraw your money at retirement. Keep in mind, though, that your retirement savings are a long-term investment, and you shouldn't get in the habit of actively trading your nest egg.

How do you know if brokerage windows are a good choice for you? Toian Bowser-Alexander, a certified financial planner with Financial Network Investment Corp. of Pasadena, California, points to the same rules that apply to all equities. "It depends on your age and risk tolerance. But as long as you're breathing, you definitely need growth."

If your employer's plan offers a brokerage window, your best option may be to use it to supplement your fund choices. Be aware, though, that picking individual stocks puts the investing onus squarely on your own shoulders and no longer on those of your 401(k) plan administrator. It's not easy to choose winners, so be sure you do thorough research--via the Internet, the business section of your local paper, etc.--and choose ones that you expect to hold for the long term.

--S.P.

--With additional reporting by Christina Verdi