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You’ve undoubtedly heard it time and time again: “Start investing in your 401(k) early.” Or, “Your 401(k) gives you free money. You’d have to be foolish not to take advantage of that.” You’re not foolish, of course, and it’s one of the most trusted ways to save for retirement, so you sign on the dotted line and tuck those dollars away for your golden years. The problem is, 401(k)s are not the great deal most people assume they are.
You’re Paying Fees
To be clear, there are fees associated with managing a 401(k), and a whopping 58% of people don’t even realize this, according to research from the National Association of Retirement Plan Participants (NARPP). What’s more, of those 42% who realize they are getting hit with fees, only about a quarter know how their charges are tabulated.
It’s Not “Free” Money
The Center for Retirement Research at Boston College did its own study on 401(k) plans. Companies like to make it seem like they’re being altruistic by offering retirement plans, but for every dollar a company contributes, salaries drop by 99 cents. In other words, you get a penny free from your employer, provided you put up with the reduced wages long enough to get the contribution. To be clear, this is by design. These plans were initially rolled out under the name “salary-reduction plans,” and employees were reassured that, even if they got a pay cut when the company’s 401(k) was rolled out, it was for the best because they’d have retirement savings.
Deferred Taxes are Not the Same as Tax-Free
Companies like to make a big deal out of how you can contribute to your 401(k) before tax, and this is true, but you will always pay tax when you take the money out. Think about that for a moment. Will your tax bracket around your age of retirement be greater or less than it is now? While we can’t predict taxes in their entirety, it’s quite possible you’ll be in a higher tax bracket as your career and salary grow (and if rates have to go up to pay off the massive national debt). So, you aren’t necessarily saving money by not paying taxes on it right now. In fact, you may wind up being taxed more. Putting money in a 401(k) is not a one-time tax savings…it merely takes your tax liability and pushes it forward to future years (yes, compounding interest effects can help the overall financial benefit of the tax deferral). But, in reality, the tax benefit is really just a calculated gamble.
401(k) Plans Offer No Guarantees
If the market’s in a downward phase or there’s an economic recession when you plan to retire, you won’t have the money you planned to have. You may wind up having to work extra years to make up the difference or you might not be able to retire at all. You may also lose out on money due to the regular volatility of the markets. Low-risk options, such as bonds, are not a dependable strategy either, because the interest rates can be exceedingly low as a source of retirement income (as in recent years).
Alternatives?
Thankfully, 401(k)s are not the only options! There are a lot of other alternatives that can be used for retirement savings. If interested, we can help you explore all of them and select a personalized strategy for your own needs. Contact us for more information. www.credofinance.flywheelsites.com
He has accrued broad financial experience working with companies ranging in revenues from $50,000 to $60 billion.Dan has worked with technology services, software, real estate, retail, manufacturing companies, professional services firms, marketing/advertising agencies, dental practices, medical practices, and various other industries, providing each with the specific financial guidance needed to establish sustained business growth and financial health.