A very common piece of advice that’s given about retirement is that of maxing out a 401K plan at work. More than a few people, including professional financial advisors, will tell you that this is a way to make sure that your retirement is truly golden.
While we’re not saying that, for most people, this is an sage advice, it’s not for everyone. The fact is, there is no single universal rule for retirement planning and indeed, everyone has a set of unique circumstances, goals or needs determining what their correct course of action should be. In some cases, putting all of your money into your 401(k) might not be the best idea. In fact, we’ve put together several reasons to not contribute. Enjoy.
- If you haven’t yet established your emergency fund. The thing is, before a person can really start saving in earnest as well as investing or any other financial task, and emergency fund should definitely be put together. Experts recommend a full 6 months’ worth of income be put aside should a medical emergency, job loss or other personal crisis arise.
Indeed, if you don’t have an emergency fund but you have a 401(k), if things go badly for you financially you’ll probably be forced to take money out of your 401(k) anyway. When you consider the early withdrawal penalty fees that you’ll face, as well as income taxes and the loss of your money’s growth potential, having an emergency fund set up first is definitely a smart move.
- When your employer doesn’t match your 401(k) contributions. If you work for a great company they will most likely match your 401(k) contributions up to a certain amount of money. If that’s the case, you should definitely meet that match every year because it’s basically free money. After that the choice is yours and should be based on other investing options that you wish to pursue.
In some cases however you’ll find that your employer doesn’t match your 401(k) contributions and, if that’s the case, there are certainly better investment strategies that you can follow. The reason is that the money you contribute will often have limited investment options and also will be taxed later on in your life. Better to opt for an alternative such as a Roth IRA or traditional IRA.
- You are deep in debt. As good an investment as a 401(k) is, it won’t do you any good at all if you’re so far in debt that the interest you’re paying is more than the interest you’re making on your account. In almost all cases it would be better to make paying down your current debts a priority before you start putting money into your 401(k). Even if you don’t have a 401(k) account, the sooner you pay off those debts the less money you will lose to high interest.
On the other hand, if you are a company has a very generous 401(k) matching program you might wish to seek the advice of a financial professional to find out what your best move will be.
- Fear of future taxes and tax increases. One of the best reasons to have a 401(k) is that it gives you the ability to defer some of your income tax. The fact is however that deferring them rather than paying them up front doesn’t always make sense.
The reason behind this thinking is simply that the federal tax bracket has had some amazing highs and lows in the last 50 years. Right now at 39.6% it’s quite low, especially when you consider that in 1980 the highest was 70% and, in 1960, it was a whopping 91%! Depending on when you retire, that number could rise back to previously high levels and, with that in mind, some people think it’s a better idea to pay taxes off now while the rates are relatively reasonable.
Predicting tax brackets is, of course, about as big a gamble as playing Craps in Atlantic City but it’s something that you may want to consider.
- Lack of financial flexibility and high fees for early withdrawal. Once your money is in your 401(k) it really should be left alone until you retire because, if you withdraw early, you’ll incur some pretty hefty penalties. If you know that you’re going to need money immediately it might not be the best idea to put your money into your 401(k) just yet.
There are also more fees associated with 401(k) plans than simply those that you incur for early withdrawal, including plan administration fees, sales charges, individual service fees, investment fees and management fees. Indeed, in an average household that has 2 working adults the money lost to 401(k) fees over lifetime may well reach $150-$200,000!
Don’t get us wrong, 401(k) retirement plans are, in most cases, an excellent way to sock money away for retirement. In the cases about however, it might be a better idea to invest your money somewhere else so that you’ll end up with more once retirement comes. If you have any questions setting up retirement account or anything else to do with personal finances, please let us know and we’ll get back to you ASAP with solutions and answers.