The short answer is “Yes… and no.”
That answer may sound like a cop out, but it’s true. Many people have used 401(k) plans and successfully planned for their retirements. I’ll show you later in this article how you too can use the 401(k) to successfully plan for your retirement.
Other people have not had such success.
I know there are 401(k) success stories because I see them all the time. I see clients that are retiring and they are rolling their 401(k) over to an IRA. They have large sums of money in their 401(k)’s. They have used them as a great way to defer taxation, and thus grow their portfolio better.
So it wouldn’t be fair to say that the 401(k) system has failed everybody. But to see the facts about how it has failed some people, I would suggest you watch this 4 minute and 44 second video over at CNBC.
Some of the highlights from that video include the following:
- 401(k)’s did not start out as the primary retirement savings vehicle
- 401(k) plans limited investment options
- Pension plans were not perfect either, as the Polaroid story illustrates
- Investors make mistakes investing, like buying high and selling low
- 401(k) system shifted retirement responsibility off of employers and put it on individuals
Also, the median balance of 401(k)’s per individual was $18,433. But it’s a little better for older individuals (age 55-64) nearing retirement with a median of $76,381. Still, that’s going to be a sparse retirement with a 401(k) balance like that.
Retirement Responsibility: Whose Is It?
One great point made in the video was the story about the anchor woman’s family members that worked for Polaroid. They were promised a pension. Then the employer couldn’t meet the obligation. Therefore, their pension amount turned out to be much less.
Wouldn’t it have been better if the money had been given to the employees so they could invest it however they wanted to? So they could prepare for their own retirement? So they could be in control?
I personally like the fact that the 401(k) is a step in the direction of giving individuals more options. It gives them more control for planning their retirement, compared to pensions. This is a good thing… up to a certain point.
It becomes bad for an individual if he/she doesn’t actively choose to participate in the 401(k) plan and put money aside for the future. It becomes bad for the individual if he chooses to cash out his 401(k) every time he switches employers.
It is bad for him if he cashes out his 401(k), even while remaining at the same employer. I talked with one small employer who quit providing a retirement plan for his employees because they kept pulling money out of it around Christmas time… EVERY YEAR!
One thing’s for sure: The responsibility for retirement rests squarely on the individual when it comes to the 401(k).
5 Steps You Can Take To Incorporate Your 401(k) Into A Successful Retirement Plan?
A lot of this is going to sound obvious. Some of it may not.
First, participate in the 401(k) plan. This seems obvious. But the CNBC article I linked to above had a startling statistic from a 2011 report by the Government Accountability Office. It found that only about 50% of workers participated in employer sponsored retirement plans.
Don’t be the 50% that doesn’t participate.
Second, contribute enough to get the full match from your employer.
Third, save money for retirement outside of your 401(k). You can do this with nonqualified funds. This is money that you’ve paid taxes on and you invest it.
You can also use Roth IRA’s. They are comprised of money that has already been taxed as well. But the big benefit is the earnings inside the Roth IRA are also tax free when you withdraw them, assuming you followed the rules.
Fourth, when you leave an employer it is probably a good idea to roll your 401(k) into an IRA. This gives you more control over your funds. You have more investment options too.
But most importantly, you will probably be more aware of it. What I mean is that the 401(k) is like a “set it and forget” plan. You probably don’t know what you are invested in. You probably don’t check it at least once a year to see if the fund allocation still meets your needs. The money just flows in each week from your paycheck and you never think about it.
You need to think about your retirement planning every now and then. Having your funds in an IRA will make you more deliberate with each action you take.
Fifth, get advice from a financial advisor on how to allocate your funds to meet your retirement goals and your risk tolerance. I know that sounds self-serving since I am a financial advisor. But you certainly don’t have to work with me.
Many people need help. Individuals do have a tendency to buy low and sell high, which is the exact opposite thing you want to do. They also have a tendency to let their emotions hurt their investment results. It is totally normal to do this, because it is your money on the line. You should be emotional about what happens to it because you will buy the retirement lifestyle you want using funds from your portfolio.
But still, the results of emotional investing can be bad for your portfolio.
Now, if you are a do-it-yourselfer for financial planning, you may not need an advisor. If you study personal finance material and put together a good plan for yourself, you may be fine. If you have the fortitude to not let your emotions get the best of you in a volatile market, you may be fine on your own.
And if you make time (on a regular basis) to review your investments and make sure you are still on track to meet your goals, you may be fine on your own.
If that doesn’t sound like you, you could benefit from a financial advisor.
Do You Need Help Determining What To Do With Your 401(k)?
Do you know someone that is wondering what to do with their 401(k)? Then forward this article to them so they can know the 5 steps to take to incorporate their 401(k) into a successful retirement plan. You can easily share this on Facebook by clicking the Facebook icon on the left of the screen. That is a quick way to get the message out to your friends.
Or maybe you have questions about your 401(k) or even IRA. Maybe you have already rolled your 401(k) into an IRA. And you may be wondering if you have it invested appropriately for your needs and retirement goals.
If you need help then feel free to reach out to me. You can easily grab a spot on my calendar for a 20 minute phone conversation by CLICKING HERE. I’ll help answer your questions and point you in the right direction.
In your service