The 401(k), 403(b), etc. have only been around for about 30 years. Most people will retire after 40+ working years. Is a 401(k) still the ideal tool for retirement? I know there are IRA's, etc, but historically, the 401(k) has been the popular and recommended retirement tool. My question is whether or not this is still the recommended/ideal retirement tool, considering the volatility and downturn in the stock market. Also, people who have recently retired probably haven't been invested in a 401(k) for the entire length of their working careers, so it's hard to gauge whether they're actually effective or not.
Is a 401(k) still the ideal way to save for retirement?
- Thread starter krunchykrome
- Start date
MovingTarget
Diamond Member
- Jun 22, 2003
- 9,002
- 115
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As spidey said, it is good with employer match and good selection of investment options.
Retirement is ideally a 3-legged stool: Personal savings/investment, pension, and social security. If you are in the younger generations, plan wisely, because you likely will have ≤ 1 legs to stand on.
Retirement is ideally a 3-legged stool: Personal savings/investment, pension, and social security. If you are in the younger generations, plan wisely, because you likely will have ≤ 1 legs to stand on.
1) Tax savings
2) Auto-save you're not tempted to move in and out, comes out before you see your paycheck
3) matching
4) mutual funds only (i think)
the only con is if you're company's HR is stupid they will go with a provider who has expensive funds
2) Auto-save you're not tempted to move in and out, comes out before you see your paycheck
3) matching
4) mutual funds only (i think)
the only con is if you're company's HR is stupid they will go with a provider who has expensive funds
purbeast0
No Lifer
- Sep 13, 2001
- 53,645
- 6,527
- 126
401k is always the #1 thing you should contribute too because you get extra $$ from your employer if you do so. if i max out my 401k every year at my job to what the employer will match, i will basically be getting 4.5% extra in my salary every year, just that it goes directly to savings and my retirement.
however it is also a good idea to have other retirement funds as well, such as an ira (roth or traditional) and possibly other investments.
however it is also a good idea to have other retirement funds as well, such as an ira (roth or traditional) and possibly other investments.
purbeast0
No Lifer
- Sep 13, 2001
- 53,645
- 6,527
- 126
wow that sucks, never heard of that. if that were the case, i'd just put my $$ into an ira, or the 401k if the max contribution was more on it.
sunzt
Diamond Member
- Nov 27, 2003
- 3,076
- 3
- 81
My old company matched up to 100% of 6%....you'd be shocked how many people didn't put 6% or more in. Hey, if you don't want an instant 100% return on your investment you are dumb! People said "I don't understand all that fund stuff", "I haven't really had time to look into it", or "I need the money right now". I could be wrong, but even if you took the money out at the end of every year, even WITH tax penalties, you'd probably be ahead yet.
With a 401k you get an immediate return of your highest tax bracket -- if the last bit of your income is in the 20% bracket, you get an instant 20% return even before the employee matching. That alone puts it way ahead of other investments right now.
Add employer matching for more free money -- mine matches 50% so that means an instant 70% return in year 1.
Then the growth is tax-sheltered. I have to pay taxes every year for the capital gains and distributions from the mutual funds in my regular brokerage account, but I don't pay this for the 401k.
That's why the conventional wisdom is to follow this order:
1. 401k up to employee match
2. Pay off debt, put aside at least $2,000 into emergency savings account
3. Roth or Traditional IRA (because the mutual fund choices are usually better than your 401k)
4. 401k up to maximum
5. Finally, open a regular brokerage account
Add employer matching for more free money -- mine matches 50% so that means an instant 70% return in year 1.
Then the growth is tax-sheltered. I have to pay taxes every year for the capital gains and distributions from the mutual funds in my regular brokerage account, but I don't pay this for the 401k.
That's why the conventional wisdom is to follow this order:
1. 401k up to employee match
2. Pay off debt, put aside at least $2,000 into emergency savings account
3. Roth or Traditional IRA (because the mutual fund choices are usually better than your 401k)
4. 401k up to maximum
5. Finally, open a regular brokerage account
rcpratt
Lifer
- Jul 2, 2009
- 10,433
- 110
- 116
I wouldn't be shocked, sadly. My company does 100% on the first 4% and 50% on the next 4%. I bet less than 15% of people put in the full 8%.
IRA has a 5k limit; 401k is 16,500 (unless older). 5k a year is not much. I do about 9k a year alone in my 401k.
But 401k is ONE place to save. It should not be the only place or way to save.
I think much of the question in the topic comes from people equating 401(k) contributions with investing in the stock market. A 401(k) is simply a tax-advanted investment account through which you can invest in anything your employer gives you access to. This includes stocks/mutual funds, obviously, but also could mean fixed-income options (bonds, stable value funds, etc.) that have much lower volatility (and correspondingly lower expected returns). So, the volatility of the stock market is independent of whether a 401(k) is a good idea.
In short, if you want to invest in stocks/bonds/fixed income for retirement, it is almost always better to do it within a 401(k) than in a taxable account.
My company matches 200% of 5% and there are still people who don't max it out :biggrin:
Dirigible
Diamond Member
- Apr 26, 2006
- 5,961
- 32
- 91
Everyone should think about their own situation and not follow some one size fits all plan.
There are income limits on IRAs. Earn too much money and you can't contribute to a Roth and contributions to a traditional IRA are taxed. In that case, contributions to a 401k, even without match, can be better.
The important thing is to actually think about this, plan, and save.
rcpratt
Lifer
- Jul 2, 2009
- 10,433
- 110
- 116
Why wouldn't they match 100% of 10% and encourage people to save more. That's kind of dumb.
Yea I did some site visits to some of our places and I almost was yelling at some to do at LEAST 5% to get the full match.
WHAT PART OF FREE MONEY AND 100% RETURN DO YOU NOT GET!?!?!?!?!
Could hit the 401k max and piss off people that are not getting their full match maybe?
rcpratt
Lifer
- Jul 2, 2009
- 10,433
- 110
- 116
Maybe, but the subset of people making more than $165k (or $220k above age 50) is pretty low I'm sure. Plus that would save the company money in that situation, and probably more savings from the special people that don't contribute the full 10%.
If it was 100% of 10% then it would be $82,500 a year before they hit their max. 10% company and your 10% = 20%.
I get 11% a year of my salary (5% from work and 6% from me).
rcpratt
Lifer
- Jul 2, 2009
- 10,433
- 110
- 116
My understanding was that the company contribution didn't count towards the limit. Is that not true? I'm not close enough for it to matter.
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