Recent surveys have shown that most employees do not understand how their employer-sponsored retirement accounts work.  In an age where pensions are less common and Social Security is on the verge of disappearing, employees have been forced to become more responsible for their comfort in retirement.

     However, employees have not been apt to embrace this new responsibility.  Today, we will look at three of the most common mistakes employees are making with their retirement accounts.

Lack of participation

     The economic instability of the last couple of years has changed America’s habits when it comes to the use of earned income.  One of the worst effects has been in how employees contribute to retirement accounts.

     One sad statistic that I read about is the fact that about half of employees are not taking advantage of their employer-sponsored retirement account.  While it is better to have a retirement plan where our employer is contributing to the account on our behalf, not having a match should not be a reason not to contribute ourselves.

     Any contributions we make to our retirement account not only reduce our current taxable income, but also get us closer to having a sizable retirement nest egg to help us live comfortably in retirement.

     We cannot let market volatility convince us that it is unwise to contribute to the plan.  We should contribute as much as our budgets will comfortably allow.

Cashing out upon termination

     When an employee leaves a job, whether the reason is a career change, a layoff, or retirement, that employee is free to take the retirement account assets.  The challenge, however, is the method used.

     More than half of employees cash out the retirement account when leaving a former employer.  They look at the funds as “free money,” in a sense.  Unfortunately, that choice costs more than most people realize.

     Cashing out a retirement account before age 59 ½ triggers a double-taxable event.  Since those funds were invested pre-tax, they are taxable upon distribution.  The funds are taxed as ordinary income.

     The second tax is a penalty for being under the age 59 ½.  The government provides the tax deferred benefit as a way to encourage saving for retirement.  If the funds are used before retirement, an additional 10% penalty is assessed.  Some employees find that they lose close to half of their account value when they choose to cash out.  Not only have they set themselves back in saving for retirement, but they have also lost a large portion of their own contributions, which came out of their paychecks.

Taking loans

     Many employees look at the ability to take loans from their retirement account as a bonus.  I argue the opposite.

     Granted, the interest rates charged on these loans are lower than on credit cards and other unsecured loan options.  It can also be considered a plus that the interest is paid back to the retirement account.  However, there is also an opportunity cost involved.

     Opportunity cost refers to the cost of not having access to another option.  For example, an employee may be paying back a 5% annual return on the funds borrowed, but they may be missing out on a year where their portfolio could have earned an 8% or 10% return.

     There is also a concern about the employee’s ability to pay back the loan.  If financial concerns forced the decision to take the loan in the first place, what happens if the employee is unable to keep up with the payments?

     A lack of timely payments may cause an employer to issue a Form 1099 at the end of the year.  That changes the characterization of the loan to a distribution.  As a result, the withdrawal is now taxable as ordinary income.  If the employee is under age 59 ½, the 10% penalty will also apply.

     I have attempted to address a few of the most common retirement account mistakes that I have seen in working with employees over the years.  The best way to reduce our exposure to these mistakes is to increase our understanding of our retirement accounts.  We can seek information from our employer, the plan custodian, or the plan’s advisor.  Fully understanding the consequences of our actions can enable us to prepare better for a great retirement.

“‘Listen to me, my lord; the land is worth four hundred shekels of silver, but what is that between me and you?  Bury your dead.’  Abraham agreed to Ephron’s terms and weighed out for him the price he had named in the hearing of the Hittites: four hundred shekels of silver, according to the weight current among the merchants.”     Genesis 23:15-16 (NIV)

     These verses are part of a land purchase negotiation between Abraham and Ephron.  Abraham needed to bury his wife.  Since he was not from the area, he had to purchase land in order to do so.  Ephron was willing to give the land to Abraham, but Abraham wanted to pay what the land was worth.  He asked Ephron to accept it.

     Abraham and Ephron’s business transaction highlight three keys to better business negotiations.

1)  Negotiate fairly

     Abraham was willing to pay the fair market price for the land. 

     Deuteronomy 27:18 says, “Cursed is the man who leads the blind astray on the road.” (NIV)  Since Abraham was not as familiar with the area’s land values as the local Hittites, he had to trust that Ephron would not lead him astray.

     Leviticus 19:35 reads, “Do not use dishonest standards when measuring length, weight or quantity.” (NIV)  Abraham hoped that Ephron would tell him the truth.

2)  Keep your word

     Abraham agreed to the terms and paid Ephron what he asked for the land.  In all of our business negotiations, we have to do what we say we will do.

     Both the inability to negotiate fairly and the inability to be honorable with our word can hinder future negotiations.  If we are not trustworthy, no one will want to do business with us.

     Proverbs 10:9 tells us, “The man of integrity walks securely, but he who takes crooked paths will be found out.” (NIV)  A tarnished reputation is not something that is easy to overcome.

3)  Have witnesses to your negotiations

     Ephron’s terms for Abraham’s purchase of the land were discussed “in the hearing of the Hittites.”  It can be beneficial to discuss negotiations with witnesses around.

     Witnesses help reduce the chances of future disagreements.  Rather than creating an atmosphere for “he said, she said,” witnesses can confirm what was said by both parties in the negotiation process.

     Witnesses can also ensure that all terms were arrived at fairly.  Since Abraham was not familiar with the prices, the Hittite witnesses were able to confirm that the price Ephron named for the land purchase was reasonable.

     Sometimes people may feel pressured into agreeing to terms that are not in their best interest.  Witnesses can help keep people from signing contracts under duress.

     The Bible provides so many tools to help us manage all aspects of our lives.  If we keep these tips in mind as we negotiate all of our business dealings, we are much more likely to reduce, or even avoid, unnecessary future mishaps as a result.

     Over the years, many financial institutions have conducted studies to get a better picture of the true state of the retiree in the years ahead.  The results that I have seen are troubling.  If workers do not change their courses of action soon, many households are headed for financial problems in their most critical years – during retirement.

Employees don’t understand fees

     According to a recent survey, many retirement plan owners realize that fees are an important consideration in choosing 401(k) investments.  However, similar to our lack of understanding about credit cards and their fees, many employees do not know how much they are paying in fees and expenses with their retirement accounts.  Many also do not feel knowledgeable about the impact that these fees can have on the growth of their retirement savings.

     The survey of retirement plan owners found that approximately two in three people reported that they did not pay fees with their 401(k) plans.  Almost two in 10 didn’t know whether they pay fees.  That amounts to 83% of people not understanding one of the most important savings vehicles that they have for protecting their financial future.

African Americans are at risk

     Another study found that African-American retirement strategies are specifically at risk.  In looking at the study on current retirees, three very critical observations stood out for me.

     First, the study found that African-American retirees are drawing about 10% less in retirement monies than their White retiree counterparts.  Second, they are also relying more on Social Security and employer pensions to fund their retirements, rather than on retirement plans and other savings and investments.  Finally, the study found that African Americans have saved, on average, only one-third of the funds saved by White retirees.

     Granted, it could be argued that less working income could play a strong role in these three observations.  I would agree with that statement – on the surface.

     Please do not misunderstand me.  I am not saying that it is financially possible for all households to save.  I realize that a lot of families, in all ethnic backgrounds, are living from check to check and are focused on just getting through the day.

     However, what really brought this to my attention was the fact that the study was able to hold those demographics constant and still find that African Americans were less likely than White counterparts (in the same age and income bracket) to save and invest.

    The study found that over the last decade, White investor participation has increased while African-American investing has not changed.  Just over half of African Americans are investing in the stock market.  That is such a small number in an age of technology, where we have access to vast amounts of information.

Identifying some of the problems

     Part of the problem is a lack of planning, and this is a problem across all cultural and ethnic lines.  The study found that about 45% of African Americans and 57% of Whites actually calculated how much they would need to save in order to retire.  That leaves more than half of workers guessing or gambling with their futures.

     Another problem is priority.  The study noted that fewer African Americans see retirement as a priority.  They are saving less because they are more worried about day-to-day expenses.

     This sounds like many of those surveyed are focused on instant gratification and making sure today is OK, rather than finding a balance between enjoying today while preparing for tomorrow.

     Again, I am not referring to any families who are struggling to make ends meet.  I am only speaking of those who could actually be doing more than they are doing now.

     The studies show that we need to plan more and get our priorities in order.  A failure to do so over the last decade has resulted in a lack of progress.  Let’s not let this next decade pass us by.

     Credit can be a wonderful concept, but it is easy to abuse.  It reminds me of a mousetrap.  The credit card companies know all about our vulnerabilities, and they put that cheese in front of us.  We think that we’ll be able to grab the cheese without getting caught, but they trap us every time.

Times of vulnerability

     What is even worse is that they are getting us at the most vulnerable time – when we turn 18.  I remember when they got me.  I was just out of high school, on my own for the first time.  The independence is refreshing, but overwhelming.  I thought I knew everything and I thought that I could handle it.

     Credit card companies love to prey on teens.  I remember them sitting on my college campus every day, enticing us starving (and broke) college students with free candy and T-shirts.  I ended up with 13 credit cards in the first year that I was out of my parents’ house.

     Since teens have no credit, it is really easy to get these starter cards.  The card may start with a $500 balance, but to a teen that has never worked, that is a lot of money.  The credit card companies encourage teens to use the cards because activity increases the credit limit.  Within months, the limit may go up to $750 or $1000.

     Today, I want to touch upon some of the important things we should know about keeping good credit.

     While we definitely do not need 13 credit cards (like I once had), it is still important to have at least one or two credit cards.  There are certain vendors that require credit cards for security purposes, such as car rental companies.  However, we do need to be careful about which cards we decide to use.

Fees and expenses

     One key determining factor has to do with fees and expenses.  If we are not careful, it can cost us a fortune to use a credit card.

     There are four fees to look for before deciding to sign up for a credit card: annual fees, over the limit fees, late fees, and transaction fees.

     Annual fees serve absolutely no purpose.  It is simply a cost to use that credit card.  These fees can vary.  I have seen a $59 annual fee, and I have seen cards try to soften the blow by charging it monthly.  But $6 a month is still a $72 annual fee regardless of how it is divided.  It doesn’t really make sense to pay additional fees to use credit rather than cash.  If we come across a card with an annual fee, we should keep looking.

     Over the limit fees will be assessed if we charge more than our credit limit allows.  For example, if we have a $500 limit and we spend $550, then there will be a $39 fee added to the next statement.

     The over the limit fee can also be assessed if your monthly interest charge takes your balance over your credit limit.  It is really important that we leave enough of a margin for the interest charge.

     The amount that we go over the limit is irrelevant.  We can go over the limit by $1 and the fee will still be enforced.  That happened to me once at the gas station back when I was in college.  I knew how much room I had available, but I didn’t stop the pump fast enough.  I went over by $1 or $2.  When my next bill came, there was an over the limit fee.  That was the most expensive tank of gas I have ever purchased.

     Credit cards companies are specific about when your payment is due.  It is important that you honor that deadline.  Read the fine print on the back of your statement to understand how the company determines when your payment arrives.  If it is not in by their deadline date, a $39 late fee is assessed.

     Similar to the interest charge taking you over the limit, a late fee can also take you over the limit.  That will result in two penalty charges.

     Transaction fees are assessed with balance transfers or cash advances.  While the credit card company may make these transactions look appealing, they are simply looking for more ways to earn profits.  Usually, these are not in your best interest.  Please read the fine print and think carefully before making a decision to use either of these services.

     These are tough times, and many people are feeling the pressure.  But as we move forward, let’s do so with discernment.  Remember and focus on the keys to prosperity.  A rash decision could cost more than you want to pay.

“Ask him to sell it to me for the full price as a burial site among you.”     Genesis 23:9b (NIV)

     Abraham was living among the Hittites.  When Sarah died, he needed to buy a burial site for her.  The Hittites told Abraham that he could have any land he wanted.  He chose a cave on Ephron’s land.

     This verse is Abraham’s request of the Hittites.  He wanted the Hittites to assist him in getting Ephron to agree to his purchasing part of his land for the burial site.

     In later verses, we see that Ephron had no problem with Abraham using the land for a burial site.  In fact, he was willing to give Abraham the land for free.  However, Abraham wanted to pay full price for the land.

We all seek handouts and freebies

     While we may now blame it on the economy, we all seem to be on the lookout for handouts and freebies.  Anything we are able to get for free, or for less than the asking price, is somehow more enjoyable.

     The truth that we tend to ignore is that it costs someone somewhere.  If we think that a large corporation is eating that cost, we must remember that they will still end up trickling that cost back down to us as purchasers of their other goods and services.  So is it really free or discounted?

     We can also look at our approach to filing our income taxes.  Are we dishonest when it comes to the things we claim on our returns?  Do we try to deduct more than we are truly able?  Do we claim dependents that we don’t actually care for?

Look at the other side

     What about when we are on the other side of the situation?  What if someone expected us to give away our goods or services for free or for less than we feel they are worth?  Would we be as willing to do that?

     This is not to say that we should never volunteer time or make donations to those less fortunate.  We are simply talking about people trying to talk us into reducing our prices or giving things away.

     We work to provide for ourselves and our families.  If we discounted everything or gave it away, we would never be able to make enough to support our families.

     When we are in business, we should offer our goods and services at reasonable rates so that people are less interested in seeking discounts and freebies.  It will make people more wiling to do business with us.

     At the same time, as a consumer, being willing to pay an honest price ensures that everyone is able to provide for their households.

     With respect to our tax returns, Jesus told us in Matthew 22:21, “Give to Caesar what is Caesar’s, and to God what is God’s.”  As a part of several communities, we have a responsibility to help support them.  Our taxes are used to develop services that we may use.  They also help support those who are less fortunate than us.

     We may not always agree with the choices that the political groups make for us, but that has nothing to do with us handling our responsibilities.

     Rather than thinking of self, let’s all aim for making decisions that are in the best interest of the larger community.