I never know where the personal-finance lessons are going to come from. Today, I heard two stories about retirement from my own family. First, my wife told me that her retirement program at work might be cut. Next, I learned that my family’s box company has had a bizarre retirement crisis of its own.

Don’t count your chickens
Kris came home frustrated tonight. She’s worked for the state government for almost twenty years (eight of those as a high-school science teacher), and though she’s proud of the hard work she’s put in, she hates how she and her colleagues are often caught in the crossfire of political battles.

This year, public employees are feeling the pinch again. There are no fewer than eight legislative proposals to alter the Oregon public-employee retirement system. In other words, the retirement rules that Kris (and her co-workers) have been playing by are about to change — perhaps drastically.

Fortunately, Kris has been a diligent saver all her life. She’s squirreled away far more than the minimum so that her retirement isn’t left to chance. In fact, just a few weeks ago, she proudly announced to me that she’s saving 30% of her income through various sources. That’s impressive. So while the proposed cuts to her retirement benefits make her cranky, and while they’ll hurt her savings rate, they’re not going to thwart her retirement.

What’s the moral here? Be prepared. Your retirement benefits can change at any time. And it’s not just public-sector employees whose retirement programs can be suddenly altered. The same thing can happen with private businesses, too.

Note: I don’t want this post to turn into an argument over public employees and their benefits. Please don’t use this as a forum to start a debate about whether government employees are over- or under-compensated. I don’t give a fig. Derails and vitriol will be deleted.

Thinking outside the box
My family owns a small business that manufactures custom boxes. In 1995, just before he died, my father established a profit-sharing program so that the employees (most of whom were family members) would be able to have the retirement savings he never did.

Here’s how our plan worked: Every tax season, we looked at how much the company earned the previous year. If times were flush, the company would contribute up to 15% of each employee’s earnings into a profit-sharing account. So, if I earned $30,000 in 1998 and profits were high, then the business might set aside $4,500 into my retirement account. When times were lean, we set aside nothing. Most years were between 0% and 15%.

Soon after I quit my job to blog full time, the business made some adjustments to the retirement plan. I’m unclear on the details (because I wasn’t involved with the process), but it seems that things were juggled so that employees could have direct control of their retirement investments. As a side effect, it also became much easier for them to withdraw the money from the profit-sharing plan. Which they did.

In fact, many of the employees yanked all of the money out of their retirement to go on trips, buy new cars, and so on. (They did this even though they suffered a 10% early withdrawal penalty and, I assume, had to pay taxes.)

When the company funded the profit-sharing plan the following year, these same employees promptly pulled the money from their accounts — again taking the 10% hit — and spent it.

The company’s solution? They simply stopped funding the profit-sharing plan. Now they give the employees cash bonuses at the end of the year instead, which averts the 10% penalty. But this hurts the folks (like my mother) who hadn’t been cashing out their retirement plans. And if I were still with the company, this would hurt me.

This is another situation where an existing retirement program has suddenly had its parameters changed, and it’s an example of why it’s important to take as much control of your personal finances as possible.

The moral
Remember, folks: Nobody cares more about your money than you do — and that includes your retirement. You’ve heard all the horror stories about the future of Social Security, but your other sources of retirement income are also subject to change. It’s up to you to take an active role in saving for the future.

Here are some steps you can take to make sure you save enough for the future:

  • Diversify your savings. Though much of Kris’ retirement savings has been through the public-employee retirement system, she’s been diligent about pursuing other options. She has a Roth IRA. She has an ING savings account. And she has her mutual funds, which are regular taxable investments.
  • Save early. Over the past few years, pension plans (public and private alike) have taken a hit. Employers aren’t funding retirements as much as they did when times were flush. People who waited to start saving are missing out on the generous employer matches of the past. (Plus, by waiting, they also sacrificed the extraordinary power of compounding!)
  • Save often. Obvious perhaps, but the more you save now, the more you’ll have in the future. In fact, the number-one thing you can do to boost your retirement income is to save more when you’re earning money. Nothing else is nearly so important.
  • Pay attention to your investments. As Robert Brokamp will share tomorrow, it’s important to watch what your money is doing. You shouldn’t monitor it every day, but it certainly pays to look in yearly (or even quarterly) to be sure everything looks the way it ought.
  • Don’t touch the money until you need it. The employees at the box factory were perfectly happy when they couldn’t access the funds in their retirement accounts. To them, it was like money they never had. As soon as they had access, though, they found reasons to spend it. Don’t be that way. Pretend your retirement funds are locked in a vault that cannot be opened except by Father Time.

I’m almost afraid to ask, but: Have you heard any retirement horror stories lately? I know people who have cashed out retirement accounts worth $100,000 in order to get at the money early. Is this common? What other dumb things do people do with their retirement savings?

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