Three Problems with Relying on a 401(k) In Retirement

The 401(k) is perhaps the most basic and simplest form when it comes to retirement accounts. As long as you’re in a job, all you need to do to sign up is complete some paperwork, and a percentage of income is held behind (it’s not even something we need to do manually). Depending on the job, you might even skip the paperwork stage because some companies have auto-enrolment. 

 

Considering some companies will match contributions, we always recommend sticking with a 401(k) for the maximum employer match. However, there’s a difference between enjoying the employer match and relying on the account in retirement. In our experience, a reliance on this account has three main downfalls. 

 

1. High Fees 

 

Firstly, you may have noticed the admin or management fees that come with 401(k) accounts. Not only this, but the funds themselves can also have higher fees compared to those you might use through a brokerage firm. Ultimately, the amount you enjoy in retirement is highly dependent on the fees you pay through the years; think about the amount of money wasted on fees when they could have gone towards a happier retirement. 

 

With 401(k) accounts, we recommend getting to the maximum match stage. From here, look into alternative solutions because your money may be better off with a no-cost IRA or another investment option with a broker. 

 

2. Limited Investments 

 

Secondly, individual stocks aren’t available with a 401(k); we’re normally limited to target-date funds and index funds. If we look at an IRA as an example alternative, the choice of investments is much wider. Depending on the broker, some investors open their IRA to include bitcoin, gold, and other non-traditional options. 

 

Of course, using non-traditional investment options and individual shares comes with risk, but the reward is also greater. If you have the time, we advise looking away from the limited investment options of the 401(k) and explore what else is available. 

 

3. High Taxes 

 

That’s right; higher taxes join higher fees and limited investment opportunities. Rather than the tax-free withdrawals of a Roth 401(k) and Roth IRA, withdrawals from a 401(k) will be subject to your income tax rate. If this is your only access to funds in retirement, your tax bill after leaving work will be significantly higher. It’s better to spread your money at a younger age. 

 

As soon as income rises above $25,000 (individual) or $32,000 (joint), you may also pay partial tax on Social Security. While withdrawals from a 401(k) do count towards this figure, withdrawals from a Roth account are exempt. If you rely on a 401(k), your withdrawals may push you past the tax threshold, which means you’ll lose a percentage of your Social Security money, too!  

 

Conclusion 

 

As you can see, these are three big problems that retirees experience every single year. You’re limited with investments, and you pay higher fees and taxes. With this, using a 401(k) alone may prevent you from living the life you desire in retirement. 

 

Speak with a financial advisor and think about putting your eggs into different baskets to maximize retirement savings! 

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Three Problems with Relying on a 401(k) In Retirement

Introduction to Dynamic Spending Rules for Retirement, by Bill Grossman

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