Bottom line: I’m not worried. We’re still in for the long haul.

Lou Dobbs: “The Baby Boomers have been a highly irresponsible generation.”

By raising the contribution percentage to 11%, you’ll accomplish:

1. Raising your contributions by $1,163 per year instead of just $375.

2. Your Federal income tax* will only go up $388 instead of $506.

3. You’ll still have a net income increase (after taxes AND 401(k) contributions of $2,200 over your previous income.

It’s amazing what a difference 1% makes. Sure, you could keep your contributions at the 10% level and still increase the dollar value of your contributions by $375 per year. But, by increasing the percentage amount by 1%, you’re taking advantage of the raise and bringing down your income tax liability and STILL bringing home close to $200 more per month. It’s a win-win situation.

That said, it’s VERY IMPORTANT that you make the changes to your 401(k) as soon as you find our about your raise. Otherwise, you run the risk of getting too comfortable (or dependent) with your new income and then it will be that much harder to increase your contribution percentage. That additional contribution amount could mean an additional $57,000 to your retirement plan in 25 years (assuming an 8% rate of return and not assuming future contribution increases).

This is how we build wealth.

* Based on 2010′s income tax brackets, standard deduction, exemptions, and the child tax credit (assuming a family of four).

Whenever I hear interviews like this with random people, it makes me realize how little people actually know about retirement planning. That young guy that says a million dollars would be nice, has no clue. Sure, one million dollars sounds nice but it will be nothing by the time he reaches retirement.

The article also mentions adding a variable annuity to the retirement income mix, adding a rider (for an additional .5% to 1% a year) that gives the annuity holder a set percentage of the original investment, and investing the subaccounts as aggressively as possible since the retiree has the rider. No where does the article is mention surrender periods. I’m skeptical of this idea.

Anyway, the article ends with this paragraph:

Variable annuities are beginning to make an appearance in some 401(k) plans, and Great-West says it has gotten a lot of interest in its 401(k) annuity offering, launched last year.

Great-West is an insurance company. I remember reading not too long ago that people were confused by their 401(k) plans because they offered too many choices. I can’t imagine that offering them a variable annuity is going to make the choices any easier. I also don’t like the fact that Great-West is most likely making a lot more money off the variable annuity than they are the other investment choices. Looks like it could be a conflict of interest.

Thoughts? Do you like variable annuities inside a 401(k)?

NOTE: As is typical whenever I post anything that is skeptical of variable annuities, I’m sure this post will draw the ire of insurance salesmen. I don’t have a problem with you leaving comments that are beneficial. That said, let’s keep it on the mature level.

Allianz Life’s Reclaiming the Future study polled 3,247 Americans, ages 44-75, with a minimum household income of $30,000. Via a statistical technique called cluster analysis (I know nothing about this), consumer segments were identified based on attitudinal, behavioral, psychographic and demographic characteristics. Five distinct financial personalities emerged as the respondents’ demographic data were analyzed and correlated with their responses about economic resilience, concerns, attitudes and financial needs.

A Closer Look at the Five Personalities

Overwhelmed – 32 percent of respondents

The largest segment of respondents, “Overwhelmeds” feel unprepared for retirement and lack confidence in their ability to put together a strategy for their financial needs in retirement. They have the highest level of credit card debt and low asset levels. They are depending heavily on Social Security for their retirement.
Resilient – 27 percent of respondents

Pragmatic and grounded, this group was hit hard psychologically during the recession. “Resilients” have finally woken up and now recognize the need for better planning – while also restoring their battered portfolios. They are most concerned with outliving their income and realize they may have to work longer than expected to achieve retirement goals.

Iconic – 20 percent of respondents

“Iconics” can be thought of as “role models” – “true blue” retired Americans who’ve worked hard and lived within their means. They’re middle class, live mostly on a pension, and are extremely disciplined and traditional in their viewpoints and values. “Iconics” may have reduced some of their spending recently, but they have a clear understanding of their retirement expenses.

Savvy – 14 percent of respondents

Those in the “Savvy” category are financially sophisticated, affluent boomers who pride themselves on having prepared well for retirement and being informed about most financial concepts. This group is living comfortably in retirement and appears to be the best-prepared of the five personalities. They are financially independent and comfortable taking risks.

Distracted – 7 percent of respondents

The youngest of the segments, “Distracteds” are caught up in the complexity of modern life and tend not to focus on planning for retirement. They have the highest income of any segment and tend to spend freely – with family and home expenditures taking priority over saving for retirement. Although they have substantial assets, they may still be worried that their savings won’t be adequate for retirement and have no real plan for growing those savings.

“Despite recent financial turmoil that may have negatively affected their retirement savings, a key takeaway from our research is that a majority of boomers now understand the role that guaranteed lifetime income can play in their retirement strategy,” added Libbe.

For more detail on each of the five personalities and a series of videos that bring those personalities to life, visit www.allianzlife.com/reclaim.

Did you see that quote? “Despite recent financial turmoil that may have negatively affected their retirement savings, a key takeaway from our research is that a majority of boomers now understand the role that guaranteed lifetime income can play in their retirement strategy,” added Libbe.

I would expect an insurance company to say such a thing. Unfortunately, many insecure people are going to get bamboozled by fee-ridden annuities in the name of “security.” Sorry I’m so skeptical but that’s the way I feel.

I would suggest that anyone who reads this blog, check out this posts I did several years ago on the Graangard Strategy (here and here).

That’s the number I get when I divide $16,500 (the 2011 maximum allowable employee 401(K) contribution) by 2000 hours (40-hour work week, 50 weeks per year).

It seems like a lot. Granted, it does not include the tax savings on contribution. The actual dollar amount would be lower after taxes. Still, the amount is pretty high. That’s why this information should be provided to high school and college students. They need to see this information when deciding what career path to take.

These numbers also do not include the company match, which I think you should look at as icing on the cake and shouldn’t be considered in figuring your contributions.

Next, I’ll look at how much the maximum contribution could grow to over a career. Interesting stuff.

What about you? Did you increase your contribution percentage this year or are you already maxed out?

Why?

Because you are young and you have one advantage that older people do not have: TIME. Time works for you in that it allows you to save less to meet your goal because you have longer to save and your retirement account has longer to compound. To illustrate the point I’m trying to make, I created the following graphic:

The above graphic assumes a 5.498% annual REAL rate of return. This return figure was derived from my S&P 500 Index data base of returns (reduced for expenses) going back to 1926 and the monthly change in the Consumer Price Index going back to 1947. Inflation has averaged over 3.6% per year going back to 1947.

As you can see, putting off your retirement planning even just a year can really increase the amount you need to save in order to meet the same goal. By waiting just one year, you need to increase your monthly savings by 6.15% in order to meet the same goal at age 65. If you put off saving until you are 30-years old, you’ll have to increase your savings by over 63%! Now, as bad as that seems, there’s a good chance you would have gotten a few raises over those 8 years so the 63% increase may not be as bad as it sounds.

It’s important to note that with all projections like this, we have to use linear appreciation (the account grows at the same rate year after year), which we certainly do not experience in the real world. Some years will be excellent years while others will be bad years. Also, I used the S&P 500 Index as the only investment choice. There are other asset classes that have produce better returns than the S&P 500 Index. I also did not include bonds as I do not have a good source for bond information.

Bottom line: In my opinion, I think you should make retirement planning your main priority as soon as possible rather than buying a shiny new car fresh out of college. And, if you can’t start young, you need to increase your savings rate in order to make up for lost time.

Note to parents: Show this to your kids!

It wasn’t too long ago that I read that most 401(k) plans were too complex and offered too many choices for employees, which made the decision-making process too difficult. So now they want to add annuities to the mix. Folks, you cannot find a more complex and difficult-to-understand product than annuities.

“One of the benefits of offering affordable, easy-to-understand annuities within a retirement plan is that it ensures plan participants receive a constant reminder that they are saving not just to accumulate wealth, but also to help workers approach retirement with peace of mind, knowing they will have income to last a lifetime,” Paul Van Heest, senior vice president, retirement plans of TIAA-CREF, said in his testimony.

What else would we expect to hear from Mr. Van Heest? His company stands to make a bundle if the rules are changed. What’s worse, is that Mr. Van Heest wants to make annuties the DEFAULT CHOICE for employees. I would also like to know Mr. Van Heest’s definitions of “affordable” and “easy-to-understand.” What kinds of annuities are we talking about? Fixed income annuities? Variable annuities?

I’m skeptical of this idea. But, then again, I’m ALWAYS skeptical of any change.