Up until recently, making regular contributions to your 401(k) account seemed like it would guarantee a good retirement. You could make eight or nine percent annually and have a good nest egg when retirement rolled around. But with the damage that the stock market has inflicted on 401(k)s and other retirement plans lately, it’s time to start thinking if we’re really saving enough for retirement.

How Much Do We Really Need?

That’s the big questions: just how much do we each need to save for our retirement? It isn’t an easy question either — the answer depends on how long we have until retirement, inflation, even how long we expect to live. There are numerous calculators online that you can use to figure out what various experts think you should be saving. Right now, though, a lot of factors are in flux — making the answers that calculators spit out a very rough estimate at best.

Unfortunately, there isn’t a pat answer. You can estimate your required savings about as well as those calculators: multiply the number of years after retirement you plan to be around by the amount of money you expect to need to live on each year (don’t forget to take inflation into account). But even that magic number may be lowballing your needs. It’s hard to guess what medical expenses might amount to in years to come or how far inflation might go. Even if you’re relatively close to retirement, perhaps in your fifties, you can’t be sure what kind of money you’ll need for your retirement. The economy is just changing too fast.

What’s To Be Done?

I realize that it sounds very pessimistic — if there’s no way to tell how much you might need to save for retirement, why even bother? Well, there are a couple of approaches that can improve the odds of living comfortably after the age of 65. First off, make saving money a habit. Every dollar you can save today is one you won’t have to worry about come retirement. If you can set aside a good chunk of money, preferably in an investment that will earn you money, you could retire comfortably. The problem is that most of us are out of practice with the habit of saving. Instead, we think it’s normal to spend every cent of every paycheck — and rely on our employers to practically force us into saving for retirement through our 401(k) plans.

Second, we need to redefine retirement. The age of 65 was chosen in an era when, frankly, most people didn’t live nearly as long as they do today and those people that did live longer just weren’t up to working. But these days, life expectancies have lengthened and it’s surprisingly common to hear about people past the age of retirement looking for a job or something else to keep them busy. So we need to redefine retirement: maybe it needs to start at 70, rather than 65, and maybe it should include a part time job. Both would take significant pressure off our retirement savings.

Millions of Americans are relying on their 401(k) plans for retirement. If you’re one of them, you probably receive a monthly statement. It’s pretty likely that youdon’t do much more than glance at that statement before filing it away.

But in 2007, the U.S. Department of Labor’s Employee Benefits Security Administration (EBSA) investigated over 1,320 cases of 401(k) mismanagement. That’s not 1,320 different employees with problems, by the way. It’s 1,320 different funds and companies with problems.

But how can you know if something is wrong with your 401(k)?

The primary tool you have is your monthly statement. Because there’s really no part of the 401(k) process where you have your hands on your money, your statement is your only chance to understand exactly what is going on with your 401(k) plan.

But if your statement doesn’t even make it of the envelope, it’s not going to do you much good. When you receive your statement each month, take a moment to open it up and look it over for warning signs. You will also want to compare it to your pay stubs, just to make sure that numbers match across the board.

10 warning signs

If something is going on with your 401(k), there are certain signs you can look for — clues that can help you keep an eye on your money. EBSA offers this list of 10 warning signs to help employees make sure that their 401(k) contributions are not being misused:

1. Your 401(k) or individual account statement is consistently late or comes at irregular intervals.
2. Your account balance does not appear to be accurate.
3. Your employer failed to transmit your contribution to the plan on a timely basis.
4. A significant drop in account balance that cannot be explained by normal market ups and downs.
5. 401(k) or individual account statement shows your contribution from your paycheck was not made.
6. Investments listed on your statement are not what you authorized.
7. Former employees are having trouble getting their benefits paid on time or in the correct amounts.
8. Unusual transactions, such as a loan to the employer, a corporate officer, or one of the plan trustees.
9. Frequent and unexplained changes in investment managers or consultants.
10. Your employer has recently experienced severe financial difficulty.

What if…

If you suspect that there is a problem with your 401(k) plan, it can be difficult to prove on your own. And because ending your 401(k) participation can have a major financial impact, most experts recommend continuing your contributions unless you are absolutely sure that something is wrong.

But if you do come to the conclusion that your 401(k) plan is being mismanaged, there are actions you can take. Contact your local EBSA office and they will begin an investigation. EBSA has had significant success with handling this sort of investigation; in 2007, the agency’s work resulted in more than $51 million in restitution and penalties.

You will need, at a minimum, copies of your 401(k) statements and your paycheck stubs, to bring a questionable 401(k) plan to EBSA’s attention.

You would never turn down free stuff, right? A free meal? A free car? What about free money? Every day you choose not to save money, you’re turning down free cash.

Admittedly, a lot of this free money is down the road — it’s available in tax incentives or interest. But there are significant reasons to save money while you can.

Retirement Accounts

If your employer offers a 401(k) plan with any sort of matching, there is absolutely no reason not to invest in that plan. Any matched funds really are free money — that’s money your employer won’t give you in any other situation. Even better, any money that you contribute to your 401(k) plan doesn’t show up on your taxes. If you earn $50,000 next year, but deposit $3,000 in your retirement account, you’ll only pay income taxes on $47,000. Most other retirement plans, such as IRAs, also provide tax incentives for saving.

College Funds

If you have any children, there are a whole list of college savings options — and there are plenty of rewards for using them. A 529 plan, for instance, can reduce your state income tax bill in some states. Money deposited in a 529 also grows tax-deferred and tax-exempt money can be withdrawn for college expenses. Basically, that means that you can avoid paying taxes on the money you earned to send your kids to college. Other college savings plans offer a variety of incentives, and many of them make it easy for your children to also save as well. Every dollar that your child can save for college before the fact is a dollar he or she won’t have to pay interest on after graduation.

Health Savings Accounts

Health savings accounts have some major advantages, especially for people unable to obtain health insurance. That’s a pretty big chunk of the U.S. population, and if you’re included, you probably haven’t done too much planning for a health care emergency. An HSA, however, allows you to save money exclusively for the purpose of covering health expenses, from immunizations to surgeries, as long as you are enrolled in a high deductible health plan, which is fairly inexpensive. Deposits made to an HSA are tax-advantaged: depending on how you set it up, you can save either pre-tax or post-tax dollars. Either way, though, your taxes will go down.

Interest

While interest isn’t the coolest way to make money, it is steady. You’ll never get rich working a steady job, but if you can keep your money earning interest, it can build up surprisingly quickly. In fact, interest is one of the key methods for making retirement accounts and college funds worthwhile. Otherwise, I think most of us would keep our savings in a jar buried in the back yard (and off the books so that we could avoid taxes).

Last week, two of my friends closed on their first home. It’s a beautiful house, great neighborhood, big yard. It’s everything they could ask for, but that perfect home is coming at quite a price.

My friends decided that now was the ideal time to buy, because home prices have dropped significantly in our area. Their logic is easy to follow: no one really knows just how low the market is going to go, so why take the risk that prices might begin to rise before they lock in that low home price? Sure, they might miss out on a significantly lower price, but then again they might not.

But, despite the low price they’ve found, my friends aren’t in a good position to buy. They didn’t save up a down payment before buying, which is usually a red flag. The mortgage crisis has guaranteed that they couldn’t get a zero-down mortgage, but they’ve managed to find the next best thing. 401(k) programs (along with some other retirement savings programs) allow you to borrow money from your account for little things like major medical expenses and purchasing a home. There are a few catches, though:

• you have to repay that money, and fast! You may have only five years to get that money back in your account or face major tax penalties.
• you lose out on any interest your retirement savings was earning.
• you often have to pay taxes or penalties on your withdrawal.

Many homeowners used their 401(k) savings to help them make a down payment, but as a general rule, it’s not a good idea. Doing so puts a person on pretty shaky financial ground: not only would you need to make your mortgage payments but you’d be making another large payment to get that money back into your retirement account. Essentially you could be putting both your new home and your retirement at risk.

Even if you’re sure that you can handle double payments, you’ll probably be better off saving up money for a down payment. Yes, you won’t get into your dream house right now, but you’ll increase your ability to keep that perfect house. And with a little effort, you may be able to surprise yourself with how fast you can save up for a down payment. You’ll have less debt overall, as well: while money withdrawn from your 401(k) is yours, the need to repay it or face penalties can turn your retirement savings from an asset into straight out debt.

My friends decided to take the risk, and that’s their — and your — choice. But piling that risk on top of a problematic real estate market seems to be asking for trouble.