You can’t expect Social Security to provide enough income to cover all of your retirement expenses. That’s where personal savings comes in. And in that sense, you have options.
If your employer offers a 401(k) plan, you may want to participate. This is especially true if that plan comes with a generous employer contribution.
In a recent New York Life survey, 55% of respondents say they keep their retirement savings in a 401(k). But while these plans have their benefits, they also have their drawbacks. So you may want to consider another house for your money.
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The problem with 401(k)s
Let’s get one thing out of the way. Some 401(k) plans are better than others, so while your neighbor’s plan may leave a lot to be desired, your plan may be fantastic. But generally speaking, there are certain drawbacks you may encounter when saving for retirement in a 401(k).
First, let’s talk about fees. You’ll typically pay hefty administrative fees with a 401(k), and they’re generally non-negotiable.
Then there are investment fees to consider. Some 401(k) plans offer more options than others, but if your options are limited, you could be stuck loading mutual funds with high fees or expense ratios that eat into your earnings.
Now, to be fair, most 401(k) plans offer a mix of actively managed mutual funds and low-cost index funds, which are passively managed and therefore much less expensive fee-wise. But while index funds can be a profitable option, they don’t give you much say in your investments.
In fact, one of the main flaws with 401(k) plans is that they don’t allow you to buy individual shares. To do that, you’ll need to consider opening an IRA.
Why is it important to choose your own stocks? Index funds do a great job of tracking and matching the performance of major indices like the S&P 500. But if your goal is to beat the market in general, you won’t achieve it by accumulating index funds. Instead, you’ll need to put together a combination of stocks that perform well enough to outperform the market, which you generally can’t do in an employer-sponsored 401(k).
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Should you get rid of your 401(k)?
If your employer offers some sort of 401(k) matching incentive, then it’s worth contributing enough of your paychecks to claim that free money in full. But beyond that, you may want to consider saving for retirement outside of a 401(k).
If you choose an IRA, you may pay fewer fees and get more flexibility with the investments you choose. Also, you may want to put some of your retirement savings into a regular brokerage account, even if they don’t offer any tax benefits like 401(k)s and IRAs.
Both 401(k) plans and IRAs require you to leave your money only until age 59 1/2 or you’ll face costly penalties (although there are some exceptions). With a traditional brokerage account, you can withdraw funds whenever you want. And if you invest well, to the point where you can retire at age 50, you won’t have to worry about not having access to the money you’ve worked hard to save.
Don’t miss the free money: 3 reasons to contribute to your company’s 401(k) plan
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