Is a 401(k) the Secret to Your Best Retired Life?

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As a financial expert, these are the holidays I nerd out about. Yeah, Halloween is cool… but what about celebrating your future self’s financial independence? That’s all treats, no tricks!

To celebrate the day, we’re going to dig into 401(k)s and whether it’s the right choice for your retirement plans.

What is a 401(k)?

First thing’s first. A 401(k) is a retirement account established by employers for employees that's tied to the stock market. If you’re at a company that offers a 401(k), you can make contributions before the money hits your paycheck— in other words, it’s pre-tax— and your contribution is invested in an account with your name on it.

People get really excited by a 401(k) because sometimes an employer can make a matching contribution to your account, which is like getting free money.

However, don’t think of this money as tax-free because you do pay tax when you take the money out. If you take it out before you’re 59-and-a-half (yes, that is really the number that the IRS came up with), you have to pay penalty fees.

401(k)s do tend to be the most popular retirement plan, but that doesn’t mean it’s going to fulfill all of your needs. Remember, trusting your employer with your money is . . . trusting your employer with your money. Why not trust yourself instead?!

Spoiler alert!

Most people don’t realize that 401(k)s aren’t actually meant to be retirement accounts. They are technically “profit sharing” accounts because they allow you to have 100% of your money in the company’s stock (which you should never do—hello Worldcom, Tyco, Enron). Maybe it’s just me, but the basic idea of having your retirement and your job being so closely linked seems less than ideal. After all, familiarity might breed contempt in family, but it breeds blindness in business. If you put all your money into your company’s stock and the company goes out of business, your livelihood is doubly screwed: now, with losing your job, and later, with losing your retirement savings.

Now, I don’t want to slam 401(k)’s on their holiday. 401(k)s can be great— but no financial vehicle is one-size-fits all, and I want to help you figure out if a 401(k) fits you juuuuust riiiiiight. So let’s cut to the chase.

A 401(k) is right for you if:

1: Your employer matches your contributions.

2: You need something easy or you won’t save at all. No shame if that’s you!

3: You want to go craaa-zy with your contributions and open different accounts…you don’t have to be exclusive, the more the merrier. The limit for a 401(k)s in 2022 is $20,500 for your personal contributions.

4: You might need to borrow from yourself. Typically if you have to borrow from your 401(k), penalties and taxes are involved. However, there are a few exceptions for qualifying situations. Before making any early withdrawal, you should talk to your HR department to understand the rules.

That’s that. Let’s look at the other side of the coin.

A 401(k) is not right for you if:

1: You don’t have six to nine months of emergency reserves in the bank. Yes, you need to save for retirement, but you need liquidity first. You can’t pay for stuff with a 401(k).

2: Your employer doesn’t match your contributions. Many do, but not all, so check. Many companies suspended 401(k) matching as a cost-saving measure during the pandemic.

3: You have a significant amount of credit card debt. Paying down debt is a form of long-term savings, because if you don’t pay it down now, you’ll pay more and save less later. Avoid the potential avalanche of debt and tackle the mountain of interest-accumulating bills first.

4: You want freedom of choice on fees and investment options. Since this is your employer’s show, they pick the plan and the fees. You get a few options, but that’s it. Even if the fees seem small at the time, they add up, and you may be able to do better if you feel adventurous and studious enough to tackle it on your own.

So, how’d you do?

Regardless of your answer, I can’t end this article without a big plea— and I need you to listen really closely for this one: if you decided a 401(k) is not right for you, you need to decide what other retirement vehicle will take its place. Likely, even if you are going to sign up for a 401(k), you will need to use other retirement vehicles to ensure you’ll get the life you want in retirement. One of the biggest financial issues that bite people in the butt is not saving enough for retirement— so, take 401(k) Day to set yourself up for financial success in retirement. You future self will thank you!

xo,

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