30 May Why Your 401K Plan Is Not Enough For Retirement
If you’re worried about how you’ll finance your retirement, you’re not alone. Only 14% of women say they’re very confident that they will be able to completely retire with a comfortable lifestyle. That means a huge number of women aren’t sure if they will have enough to live comfortably during their retirement years. In fact, less than 20% of women even know how much money they’ll need when they retire. And of those women who estimated their retirement needs, almost 60% just guessed how much they’d need.
Now, I’m not pointing this out to make you feel bad. Women wear so many different hats today that they can hardly keep up with daily demands, much less deal with the ins and outs of retirement planning. Retirement seems so far away for many that it just gets pushed to the back of their minds (if it’s there at all) to deal with at another time.
Other women just trust that their 401(k) plan or IRA will be sufficient, but they don’t realize that their 401k plan may not be enough for retirement. Because many women count on their workplace retirement benefits to take care of them, they don’t make it a priority to save anything extra for retirement. This is just plain risky.
Additionally, a whopping 92% of members of working households don’t even meet conservative savings targets for retirement based on their ages, incomes, and their 401(k) and IRA balances. In fact, 65% of these same households fall miserably short when adding their whole net worth and 401(k) and IRA balances.
In today’s world, it’s important that women prepare for the unexpected. The loss of a job, the death of a spouse, or a diagnosis or sickness can happen to anyone at any time. The scary truth is that few women (only 36%) have any kind of backup plan in case something unexpected happens and they have to retire early.
The Benefits of a 401(k) Plan
Now, don’t get me wrong. Having a 401(k) plan isn’t a bad thing; it just shouldn’t be your only thing.
Although there are some governmental restrictions and rules, the gist of how a 401(k) plan works is this: You can elect to have money deducted from your paycheck to go toward a retirement account. Sometimes employers will contribute to or match what you put into the account; sometimes they won’t. Fortunately, this money is also tax-deferred.
Keep in mind that there are restrictions for when and how you can access your retirement funds, and you may get slapped with a tax penalty if you withdraw the money early.
3 Reasons Your 401(k) Plan Isn’t Enough for Retirement
#1 – Taxes and Inflation
Unfortunately, Uncle Sam always gets his share. Even though 401(k) deposits are tax-free, you end up paying taxes on that money later. You can expect to pay around 30% of your total 401(k) savings in taxes, so you can’t count on that being available to live on.
And you surely understand that the cost of living and inflation are ever-increasing. Therefore, it’s likely that next egg you’ve built up won’t last as long because it won’t buy as much in the future as it does today.
#2 – Compounding Fees and Other Costs
Another reason your 401(k) plan isn’t enough for retirement is that there are many undisclosed fees involved. Honestly, this seems a bit unfair, but it’s part of the game. There are many administrative fees, including bookkeeping fees, legal fees, finder’s fees, and trustee fees, just to name a few. In actuality, there can be more than a dozen extra fees that can deplete more than half of your savings!
Check out the article How to Know if Your 401(k) Plan Fees Are Too High. Then talk to your financial advisor about how you can minimize these fees.
#3 – No Liquidity
Your 401(k) funds are locked away until you reach 59.5 years of age. If you withdraw money before then, you pay huge penalties. Consider this money as unavailable and inaccessible; don’t think of it as an emergency fund. Additionally, if you do take money out of your 401(k), you have to pay taxes on it based on your current tax bracket. And if you end up in a higher tax bracket because of the amount you withdraw, then you pay even more in taxes!
There may be particular circumstances that warrant borrowing from your 401(k), but it’s important that you speak with a knowledgeable consultant so that you understand all the requirements, which can include paying back the amount you borrow.
Honestly, the lack of liquidity can be a good thing, especially if you’re a spendthrift. Since your 401(k) isn’t easily available, you’re more likely to leave it alone, which means it will be there for you when you need it—during retirement.
Solutions
Now that you can see that your 401(k) plan might not be enough for retirement, let’s talk about some strategies that can make up for it.
#1 – Consider a Roth or an IRA
To achieve more flexibility and options as you near retirement, consider a Roth or an IRA. Even though these are taxable accounts, you’ll find that contributing regularly to these accounts will give you additional choices at retirement time.
#2 – Work Part-time
You can lessen financial pressure by working part-time during retirement. In addition to lessening the stress of your retirement funds, working part-time helps keep you busy, active, and out of trouble! And rather than quitting work abruptly, you can slowly cut back on your hours. So don’t dismiss this as part of the way that you can fund your retirement years.
#3 – Consult with a financial advisor
Surprisingly, only one third of women use a financial advisor for retirement recommendations. But of those who do, they enjoy more than 50% higher savings than those who don’t. So do yourself a favor and seek counsel about your retirement needs—so you’ll have plenty to live on, and you can sleep better knowing that.
Ladies, it’s time to think differently about retirement. Don’t wait for retirement to creep up on you; it’s coming, and there’s no stopping it. Contact the good folks at www.russellandcompany.com to learn about unique approaches to your retirement needs and obtain advice from trusted and knowledgeable financial advisors who care about helping you create the best future for you.
