Mixed News for Your Finances

If you want to find some evidence that our sputtering economy is starting to turn itself around, look at the recently released data from your friends at Fidelity Investments: It seems that lots of companies that had reduced or suspended their matching of employee 401(k) contributions have begun resuming their previous matching levels. Fidelity is in a good position to know about such things, since it's the world's top manager of employee retirement plans and has more than $1 trillion under management.

Some 8% of companies had cut back or halted their matching earlier this year, and already, Fidelity reports that among the many companies that had cut back or halted their matching earlier this year, 27% of them have reinstated their plans already or expect to in the coming year. Among big companies, ones with 5,000 or more plan participants, 44% that have done so or plan to.

So that's certainly a bit of good news.

Workers cut back, too
Here's some less-good news: Fidelity also found that when companies suspended their matching, workers were almost twice as likely to cut back on their contributions. I can see how this happens, since it's often the matching that gets workers to participate in the first place. And they're often advised (even by folks like us) to contribute at least enough to take full advantage of available matching funds, since not doing so is leaving free money on the table.

Still, it's terrible to see participants cutting back on their contributions, because 401(k)s are likely to be critical parts of most of our retirement plans. Social Security is nice, but it will rarely provide enough for us to live on in comfort. And increasingly few of us have pensions to rely on. So we need to build our own nest eggs -- through IRAs, 401(k)s, and the like.

Some people might have slowed their contributions after seeing the value of their accounts fall. Here are some of the most popular Fidelity funds and their performance in 2008. Many 401(k) funds held these and other funds with similar performances:

Data: Morningstar.com. As of Dec. 9.

Clearly, any accounts with considerable fund holdings like these suffered mightily in 2008. But selling or deciding to cut back on contributions would have been the wrong thing to do, because there's been a sizable recovery in 2009. The S&P 500 has risen by more than 20% so far this year, for example.

Cutting back would have been a mistake not just because you'd miss out on this year's recovery, but also because many times, when people cut back on their contribution level, they'll forget to ratchet it back up. So while companies are resuming their matching policies, many plan participants will be missing out on the maximum value. If you're in this camp, don't put it off!

One final reminder: Don't assume that you're doing well to contribute just enough to take full advantage of your company's match. The company might, for example, match 50% of your contributions up to 6% of your salary. If so, that's nice, but you can do better than contributing just that 6%. Imagine that you earn $60,000 per year. Investing 6% would amount to $3,600. If you could sock away 10% ($6,000) or 15% ($9,000), you'd grow a much bigger nest egg. Here -- see what those sums invested annually for 25 years would grow to, if they grew at 10% annually, on average:

Don't you think almost a million dollars will serve you more? As the folks at our Rule Your Retirement newsletter would tell you, to make your money last, you should conservatively aim to withdraw 4% of it annually, adjusting it for inflation each year. So 4% of $389,000 is $15,560, or almost $1,300 per month, but 4% of $974,000 is $38,960, or nearly $3,300 per month. That's quite a difference, no?

So be smart about your 401(k) and your other retirement accounts -- your retirement will thank you for it!

Learn more:

• Your 401(k) Isn't As Bad as You Think
• The Best Stocks for Your First IRA
• The Best Way to Invest Your IRA