Sunday, December 11, 2016
Retirement Planning: Do I really need to contribute to a 401K?
There's all of this pressure out there about retirement accounts, and how to save. You have SEP's, IRA's, Roth IRA's, 401K's, 403B's, TDA's... The list goes on and on. It can really make your head spin. In this blog, I DO talk about which accounts to use, and when, but there is one much more fundamental question that we have not addressed.
Do I actually NEED a 401K?
The short answer is "no." You don't actually need a 401K. Are you having a heart attack yet? I can't think of many financial advisers that would like the fact that I'm telling you that right now. In fact, I can feel the cyber "stink-eye" coming my way.
There is a big BUT coming.. You were waiting for that weren't you? You could almost feel it, I bet.
You do not need a 401K. You need to replace your working income with another income source. You need "passive income," if you will. Passive income is income that you receive without actively participating in a business. This could be investment income, rental income, etc.
To further illustrate my point, a story...
Once upon a time, people graduated from high school. Once gainfully employed, the person would dedicate their lives to one company, work there for 30+ years, collect a gold watch, a "going away" party, and a pension with which they would live out their retirement. This pension would act as a steady paycheck from the company they devoted their lives to, only they didn't actually have to punch the time-card any more. Great deal, right?
Well, it is a great deal, but like many beautiful animals on our dear earth, that deal is more or less extinct... Employees stopped working for the same companies for their entire careers, and employers stopped paying pensions...
Enter the 401K... So, out rolls this new idea. Employers offer this "investment opportunity" to employees. Employees contribute their own money to it, and let it grow for retirement. In order to entice employees to pay into this investment, the employer (sometimes) agrees to contribute some matching funds as well.
So.....What was the point in this little story, you ask? To point out to you that YOU are most likely already funding your OWN retirement. There are a few employment situations that offer a proper pension plan, but if you aren't in one of them, you are on your own.
If your employer offers you a 401K plan that has a match, you need to contribute AT LEAST enough to get the maximum matching funds. Otherwise, you are ignoring free money. You should NEVER ignore free money!
If you don't work for an employer that offers a 401K, don't worry about it! Here's what you should worry about: replacing your income. You need to invest your money in a way that will allow you to collect checks when you retire. This is where you have decisions to make. HOW are you going to put all of your dollars to work for you? You can use an investment account, and contribute regularly to a 401K or IRA at regular intervals so that your money will grow enough to meet your needs in the future. You can contribute to non-retirement investments (though you might lose certain tax advantages). You can invest in rental properties. You really have a lot of choices. Don't misunderstand me. I am NOT telling you to ignore a perfectly good 401K plan. What I am suggesting, is that you consider the BIGGER picture when it comes to replacing your income. Your retirement is about more than a 401K plan, and one size does not always fit all when it comes to your money.