$27.7(Source: U.S. Department of Commerce)

Americans are poor savers. We`re an instant gratification society, and if we have the money we spend it. Personal savings rates fell to 1.2 percent of disposable personal income in May, according to the U.S. Commerce Department. We haven`t fallen that low since the Great Depression.

A 401(k) plan is “the least painful way to save. It converts spenders into savers,” says Benna.

2. Dollar cost averaging

401(k) plans let you take advantage of an investment technique called dollar cost averaging.

Over time, as you invest systematically, you will be buying shares at whatever the current market price is. Sometimes, you will buy fewer shares at higher prices. Sometimes you`ll buy more shares at lower prices. When you buy more lower-priced shares, that will help bring down the average cost of all your shares. So when share prices rise, you would see profits off that lower base and on a greater number of shares.

Since a 401(k) plan takes the same percentage out of every paycheck, it does the systematic investing for you.

Bear in mind however, that periodic investment plans do not assure a profit or protect against loss in declining markets. Dollar-cost averaging involves continuous investment in securities regardless of the fluctuating price of such securities. Investors should carefully consider their financial ability to continue their investments during periods of low price levels.

3.

Contributing to a 401(k) plan reduces your taxable income. Uncle Sam lets you put a maximum of $10,000 every year into a 401(k) plan before he starts calculating taxes on your gross income.

If you earn $40,000 annually and stash $2,000 a year (5 percent of your salary) in a 401(k) plan, the government only collects taxes on gross income of $38,000.

You can also use 401(k) contributions to push yourself into a lower tax bracket, where you pay a lower tax rate.

“It`s possible to make 401(k) contributions to drop a tax bracket. I`ve seen that frequently,” said Greg Thurin, district manager and personal financial advisor with American Express Financial Services.

But, wait, there`s more. Taxes are deferred on all the profits you make on the money while it`s in the 401(k) plan. You do eventually have to pay the piper, when you pull the money out at retirement. But by the time you quit work, your annual income could be a lot lower, in which case you`ll be paying taxes at a lower rate.

If you take money out of the plan before you reach age 59˝, you have to pay a 10 percent penalty tax in addition to income tax on the money and profits. However, if you stop working at age 55 or later you may not have to pay the penalty, though you will still owe taxes.

4. Rates of Return Compounding

Let`s go back to Janet and Hugh and see what would happen if they left their money in the account.

Assume they don`t add any more money to the plan, and what they have earns a hypothetical 8 percent rate of return. Over the three decades until the Levauxs reach retirement age, that $10,000 could grow tenfold, to $100,000, through compounding. (Of course keep in mind that rates of return and principal value of investments will fluctuate over time.)

When earnings are compounded, they`re rolled back into your account so that the next time you potentially earn a rate of return, it`s on the new whole amount. In effect, you earn money on your gain — and taxes are deferred on all of it.

“The easiest way to think of it is with the rule of sevens,” said Jonathan Berk, assistant professor of finance at the Haas School of Business at the University of California at Berkeley. “If you invest $100 into an account and compound it, it can double every seven years.” (Bear in mind, though, that investments in securities will fluctuate in price on a daily basis, so it is impossible to determine with any certainty how long it will take for any such investment to double in value.)

That`s a pretty rough guide, he says, but the point is well made. Each time profits are calculated your money works for you even harder. The benefits are even greater if you continue to contribute to the plan throughout your working life.

As renowned physicist Albert Einstein is credited with saying, “The greatest invention in the world is compound interest.”

5. Higher contributions than an IRA

In the 1980s, it seemed that just about everyone opened an IRA. That was a good thing because many Americans started saving for retirement.

But IRAs have limitations. One is that the government allows you to only save $2,000 a year, tax-deferred. (And depending on your income level, you may not be able to deduct all or even part of your contributions from your gross income.) On the other hand, you can save up to $10,000, tax-deferred, in a 401(k), and your contributions are always tax deductible.

And things may get better. It`s likely that the maximum contribution to a 401(k) plan could rise to $10,500 in 2000, Benna says. Congress is also considering rules to raise the contribution limits for IRAs.

If you work for the right employer, a real bonus of a 401(k) plan is your company`s matching contribution. In short, it`s free money.

“You can get similar things with an IRA. But no other plans have the employer match.”

Michael Schuster, Competitive Human Resource Strategies

“(No other investment) can match a 401(k) plan,” said Michael Schuster, managing partner with Competitive Human Resource Strategies, an industry consultant. “You can get similar things with an IRA. But no other plans have the employer match.”

About 87 percent of companies that offer 401(k) plans match employees` contributions by some percentage, a 1996 survey by Watson Wyatt says. The average match is 50 cents on the dollar on the first 6 percent of pay.

What`s more, the employer match is also tax deferred.

But there`s a hitch. You generally have to work at your company for a few years before you`re vested — that is, before the employer contribution actually belongs to you. Some companies let you vest a little bit at a time, while others only vest you fully after a set number of years.

7.

Even if your employer match hasn`t vested, you still own your contributions. Unlike traditional pension plans, you can take the money in a 401(k) with you if you switch jobs. There is a caveat: The government gives you 60 days to find a new tax-sheltered plan to put the money in. You can put it into your new employer`s 401(k) plan, if the plan allows rollovers, or roll the money into what`s known as a rollover IRA.

If you miss that 60-day deadline, however, you have to pay taxes on the money in the plan, plus a 10 percent penalty if you are under 59˝. Your best bet is to do a direct rollover from one plan to the next, and never have the check made out to you.

8. Professional advice

401(k) plans offer ordinary people the opportunity to invest in funds that might otherwise be open only to big-money investors. Many mutual fund companies require hefty minimum balances to open accounts. But some 401(k) plans offer participants the opportunity to invest in the same funds, for as much (or as little) as they want.

9. Social Security won`t be enough

Financial professionals generally say you`ll need between 70 and 90 percent of your pre-retirement income to live comfortably in retirement. Where is that money going to come from? Social Security won`t do it alone.

Saving a little bit each month in your 401(k) should help you to have enough money to retire comfortably when the time comes.

Arthur Wylie is a registered representative of Sammons Securities Company,LLC. Aregistered broker/dealer and member NASD and SIPC