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How Can I Catch Up on Retirement? PDF Print E-mail
Written by CARRIE SCHWABPOMERANTZ, Creators Syndicate   
Thursday, 26 May 2011 06:14

Dear Carrie:

I was out of work for 14 months and had to dip into my retirement savings to make it. I am working again and want to "catch-up." What strategies would you suggest to help? Also, since I can't put that money back in my 401(k), what sorts of accounts would be best to look at? — A Reader

Dear Reader:

Fourteen months is a long stretch of unemployment, and it's unfortunate that you'd need to tap your retirement account to stay afloat. I'm glad to hear you're working again and elated to hear you want to get back on track with your retirement saving. As your question acknowledges, you can't just put withdrawn money back into a 401(k), unless of course you borrowed from it. And unfortunately, as you learned, when you make what the IRS calls an "early distribution," you have to pay a penalty in addition to taxes. So, your savings have undoubtedly taken a hit. But there are several ways you can get caught up; the following is a rundown:


Obviously, you want to take full advantage of the retirement plan at your new job, whether that's a 401(k), 403(b) or another plan. As you probably know, 401(k) and similar plans are just too good of a deal to pass up — given the fact that contributions are generally made with pretax dollars, and investment gains and income are untaxed until you start withdrawing the money when you retire. For 2011, you can contribute up to $16,500, plus an additional $5,500 if you're 50 or older — well over the $5,000 you can put into an IRA ($6,000 if you're 50- plus). If your company offers a matching contribution, then your 401(k) plan is even more appealing. Saving more is the easiest (and most effective) way to help build wealth.


If you haven't already, you can also open an IRA. However, since you participate in your company's 401(k) plan, you can only fully deduct your contributions to a traditional IRA if your adjusted gross income (AGI) is less than $56,000 (this deduction is phased out for single filers with AGIs between $56,000 and $66,000 and for those married, filing jointly with AGIs between $90,000 and $110,000.) Or you may be eligible to open and contribute to a Roth IRA, depending on your income.


There's no rule that says retirement assets must be held in a retirement account. You can always save and invest in a traditional brokerage account. Your investments aren't tax-deductible, of course, but there are no limits to how much you can save. And you can construct a tax-efficient portfolio to help reduce the drag of taxes on total returns. Talk to a good financial adviser for details. In fact, some people relish the flexibility of a brokerage account because it offers essentially unlimited investment options and you'll never be forced to take a distribution.


Finally, and I say this with a degree of caution, you can consider investing more aggressively in an attempt to earn a higher return. Depending on your current holdings, your appetite for risk and your time frame, it may be appropriate for you to shift a part of your portfolio from bonds or cash into stocks. But this requires a thorough understanding of the risk you might be assuming, including the potential for negative returns and an appreciation of the importance of a long-term time horizon (say, five years or more). Also, realize that the potential return of a portfolio heavily weighted in stocks (say more than 60 percent or so) may well not justify the risk. So if you decide to go this route, I suggest working with a trusted, objective financial adviser to create a portfolio that has the potential to generate some extra performance and still offers a high degree of diversification. I realize this may be a daunting prospect, especially given the recent recession, but it can be an option you'll want to consider.


As a final note: I know you realize that dipping into your retirement plan is something to be done only in an emergency. So, I encourage you to do what you can to ensure you won't be in that position again — by starting to build an emergency fund that is highly liquid (like a money market account or laddered CDs). Then add to it every month until you have at least six month's or even a year's worth of living expenses.

Carrie Schwab-Pomerantz can be e-mailed at This e-mail address is being protected from spambots. You need JavaScript enabled to view it .


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