Your 401k’s Dirty Little Secrets

If you have a 401k, I commend you for taking steps towards your retirement but it’s important that you have a understanding of the downsides of a 401k plan.  First, I will talk about the upsides:

1. If your employer is matching your 401k, that is huge. It’s basically free money and I say collect as much as you can, for as long as you can.

2. Doing something always beats dong nothing, so kudos for having a plan of any kind.

Here are my concerns about 401k plans:

1. If you put your hard earned money in a 401k plan and have some sort of financial crisis, it could be costly to take money out before you are ready to retire.  If you have to take money out (for any reason including emergencies) before age 59 1/2, you will be subject to an early withdrawal penalty of 10%, plus you will then be taxed on the money at your current tax rate.  Some companies allow you to borrow against your 401k balance and even will allow you to repay right from your payroll deductions.  If you happen to lose your job before you repay the money (your money), the loan will be treated as an early withdrawal and you will be subject to the same penalty and taxes, unless you have the means to pay it back.

2. When you do retire or become eligible to take money out without penalty (usually at age 59 1/2) you now have to pay taxes on that money.  This means you get less of your money at a time when may need it most. While everyone assumes that people at retirement age will not need new cars and will own their properties free and clear, today’s economy show us a different story. It paints a picture of people who have worked hard that worry about outliving their retirement, that worry about losing their homes, and ultimately end up working – and often very hard – at a time when they should be enjoying life.

If your employer has contributed, then you can tell yourself that their part is paying for the taxes and that’s a big plus, but if most of the money is you own hard earned money, then you might be taking losses that you don’t need to.

3. You can lose money in your 401k plan. Many people have the options of choosing the types of investments that they want their funds to go into. But does that little intro session really qualify you to make those choices? Isn’t really just a gamble? Heck, I was able to put my 401k funds into a stock trading account and dwindle it away if I wanted to. Thankfully, I found a good stock pick that helped it grow (it went from $12 to $30 a share in about a year!), but I knew this account was not my ultimate retirement vehicle anyway, so I gave myself the freedom to play the market a bit.

So What’s a Better Option?
My recommendation is to build your own retirement plan using a specific type of life insurance product. There are a few that do the job, and of those, there are some that do it better than others.  If properly structured, you will not outlive your retirement and best of all, you can take out tax free distributions and still leave money for your estate when you depart from this world. If you start young enough, you can put in the money that you need for retirement over a certain time frame and it will grow for you so that you will live very well in your retirement years. In fact, getting your kids started with a policy could be one of the best things you ever do for them. It’s inexpensive to insure a child and imagine if they had their retirement paid up by the time they were 20? I know it sounds far fetched, but once you understand how the numbers work (compounded growth, protections against losses, etc.) it will all make sense.

And yes, you are taxed on the money that you put in initially, but it’s protected against losses (unlike 401k funds) and the growth should supersede the portion paid our for taxes.

I am not an insurance agent or an investment advisor, but I am someone who is passionate about helping people understand the often confusing world of personal finance. I also have – and use – my life insurance policy as a banking / investment / retirement vehicle, and it’s one of the best financial decisions I ever made. If you need a referral to someone who might be able to give you some more insights as to how you can best structure your retirement, I would be happy to make a recommendation. Simply contact me, preferably via email or by using the contact form.