One of the main differences and perks of a 401(k) compared to a traditional savings account is that many employers will match the money that you’ve contributed. According to Ubiquity Retirements and Savings, about 98 percent of employers offer 401(k) matching. Still, the U.S. Bureau of Labor Statistics found that only 51 percent of Americans are investing in a 401(k) plan, even though 68 percent of Americans have access to one. Many people believe that it’s time to ditch the 401(k).
With 401(k)s, There Are No Guarantees
“The employer match is not guaranteed, as many people found out when companies reduced or suspended the match during the pandemic. And it turns out the match is not really ‘free money’ after all, because companies that offer matches simply make up for it by paying less in salary, according to the Center for Retirement Research,” explains Pamela Yellen, financial expert, New York Times best-selling author, and founder of Bank On Yourself. As tax rates continue to rise, Yellen says that people might be met with a big surprise when they withdraw their money. “As taxes rise, deferring them in a 401(k) or IRA means you’ll pay more later—potentially a lot more. No one knows what tax rates will be in the future, no one saving in a tax-deferred 401(k), IRA, or investment account can know what their retirement account(s) will actually be worth when they want to tap into them,” Yellen explains. Ahead are more reasons why some people over 50 don’t have a 401(k)—and maybe you won’t, either. Additionally, people can’t touch that invested money without penalty until they’re 59.5 years old. Instead, people will use that money to invest in other ventures, such as real estate, stocks, and other businesses, which might offer them a bigger return on their investment. On average, by the time a person reaches the age of 55-64, they’ll have $232,379 in their retirement account. Rich people will have more than that by investing in other pursuits and saving on their own. From 2005 to 2019, she moved her 401(k) account from an employer into a linked trust account that allowed her to trade equities and ETFs, not just mutual funds. “Most 401(k) plans greatly limit investor options and, thereby, their potential gains,” Petty explains. “This one did not, as it offered much greater choice and flexibility. The account I used and still use today is the Charles Schwab PCRA Trust account.” However, if you have the opportunity to invest in a 401(k) that gives you lots of investment choices (which is rare), she says, then having a 401(k) may be a good option as part of a larger, diverse investment strategy. “I am a writer so I have been freelance for almost 20 years,” Grey explains of her self-directed, late-bloomer career. So how is she managing it at age 60 without retirement savings? “I live in Israel, thank god,” she says. “So there’s great medical care.” Another retirement option is a Roth IRA. “There won’t be any tax benefit on the contribution, but it’ll be tax-free when you take it out, under the current rules,” he says. You can also use regular savings and investment accounts, Landersman adds. The upside is, there are no limits to your contributions. The downside: Your contributions won’t be tax-deductible. Becky Ruthman, a 64-year-old freelancer, has focused on alternative retirement plans such as IRA and SEP accounts, as well as rental properties. However, she lost a lot of money in stock market crashes when she invested with an IRA. Aside from her self-employed and rental incomes, Ruthman has access to early social security. Those who are self-employed, like Ruthman, can use SEP IRAs, SIMPLE IRAs, and solo 401(k)s to help them save more for retirement and put away more than they can in a traditional or Roth IRA. Another way to save for retirement is by taking advantage of a health savings account or HSA. “HSAs receive triple tax benefits with deductible contributions, tax-deferred growth and tax-free withdrawals when used on qualified medical expenses,” Lam-Balfour says. Since healthcare can be a significant cost in retirement, beefing up your HSA can be beneficial for retirement. Yellen also advises that people put their money into high-cash-value, low-commission dividend-paying whole life insurance. “Your cash value can easily and immediately be tapped for any purpose at all, and your policy can continue growing as though you never touched a dime of it,” she explains. Like any retirement plan, there could be costly disadvantages to life insurance plans depending on your income and age. Not all retirement options are suitable for everyone. Consult with a financial advisor or retirement expert before making a big decision about your future.
