A recent survey showed that 401(k) plans are now the No. 1 way workers save for retirement. Those fortunate enough to remain steadily employed have relied on their employers to provide financial security for their retirement.
Your 401k plan is based on matching funds—your employer is contributing to your retirement plan, but so are you! You are faithfully contributing a share of your monthly paycheck to your 401k plan, but is this really the best use of your retirement-saving dollars?
Here are just 5 risks associated with 401k savings programs:
1. You can be wiped out overnight – 401(k) investment rises and falls with the (volatile) stock market, over which you have no control. From 2000 to 2015, the market was up just 8.4 percent total when adjusted for inflation, or 0.56 percent per year.
2. Fees and compounding costs – Managing the mutual funds inside 401k’s is costly—everybody takes a piece; there are fees for lawyers, trustees, bookkeepers, etc. Compounding fees take a huge bite out of your retirement fund as well: An example: If you contribute $5,000 per year, from 25 years old to 65, and the fund goes up 7%/year, your money would turn into est. $1,143,000. Yet, you’d only get to keep $669,400—less than 60%.
3. Lack of liquidity – Money in a 401(k) is tied up with penalties for early withdrawal unless you know how to safely navigate obscure IRS codes. You can’t access your money without great difficulty and/or taking a huge hit. Well, this makes sense, right? This is all about saving for retirement, not taking your money out early for a Caribbean vacation. But wait—what if you’re not one of those lucky people who hangs on to his/her job throughout the inevitable economic down cycles. What if you and/or your spouse lose your jobs and remain unemployed for an extended period? What about extended illness or myriad other unanticipated situations? You may need that money to keep a roof over your head and food on your table. Remember that this is your money.
4. Lack of knowledge – People tend to take their 401k’s on blind faith. Think about it. Do you know anything about the funds in which you’re invested or the details of the companies inside those funds? What do you know about the fund manager’s philosophy, history–and most of all, his/her track record? What’s your expectation from something from which you’ve made a minimal intellectual investment?
5. Taxes – 401(k)s are tax-deferred, meaning you avoid paying taxes today by committing to paying them later. But wait—you’re likely going to have less money when you retire than you have now. Who wants a huge tax burden? Furthermore, given the state of the national debt, it’s a fair guess that taxes are going up. How much of the hard-earned money that you’re faithfully contributing every month is going to be eaten up by taxes?
If we have your attention, let’s talk about alternatives to 401k retirement plans. Contact Palma Financial Services for a free consultation, 925.307.5454.