Saving for retirement should be a priority from the first day you start your first job. A 401(k) is, traditionally, the n°1 savings option for most employees.
But is a 401(k) enough to fund your retirement?
Most experts say you need access to about 80% of your current expenses to be able to retire comfortably. Of course, rules apply only for the majority of cases, in reality each individual’s needs might differ from one case to another.
A 401(k) plan has its limitations and, even if you manage to max it out every year, your retirement funds might still not be enough.
There’s no doubt there are plenty of ways to live frugally when retired. However, your golden years should be a time to finally relax after decades of work and financial stress.
In order to retire comfortably, experts suggest about 80% of your income should suffice when you’ll reach retirement age.
It’s only normal to have less expenses when you no longer have to work. Mortgage will probably be paid off by then, your car loans and credit card debt are hopefully not a problem anymore. Not to mention you won’t be commuting to work anymore and have plenty of time to cook at home, rather than buy lunch every single day.
Before deciding to stick to just a 401(k), it’s probably wise to take certain factors into consideration.
While having to focus on a single retirement plan sounds comfortable, easy, and doable, in some cases it may not be enough to continue to live comfortably during your golden years.
Inflation rates could influence the cost of living
Did you also notice a huge difference between regular expenses 20 years ago and expenses today? It’s no secret the cost of living keeps on increasing.
While applying the 80% rule is a great start, you should also think about how times could change in 20-30-40 years.
While your retirement savings may steadily grow in a tax-deferred environment, inflation might just take its course and “mock” the heck out of you when you reach retirement age.
The legendary 4% withdrawal rate might not be enough for you to live comfortably.
Tax rates might have a negative impact on your finances
A 401(k) plan lets your money grow without it being subject to tax. You deposit your money and watch them multiply without accruing taxes.
However, the minute you need to withdraw your money when you’re “old and grey”, your money will be taxed according to the current rate. And who knows what that implies after a few decades.
The obvious problem here is the inability to actually “guess” what the tax rates will amount to when you retire.
You may pay less in taxes than you do now, which would be great! But you may pay a ridiculously higher rate than you originally anticipated.
Unexpected expenses might occur even during retirement
It’s not uncommon that unexpected expenses may occur even after you retire.
What if your children need some financial help? As a parent, who can say no?
Something around the house might get broken and cost you thousands in repairs.
Worse case scenario, what if someone very close to you falls ill and needs your financial help? Would you let them suffer if you know you could lend a hand?
There’s always a possibility something unexpected might happen and having money to immediately grab onto helps! But if that means you’re left without a big chunk of your retirement funds, maybe a 401(k) isn’t enough to fund your retirement after all.
Debt problems might influence your ability to save
If debt continues to play a huge role in your finances, then your retirement funds are in trouble.
First of all, it’s difficult to both pay off debt and save for retirement at the same time. So, there’s a big possibility you won’t be able to max out your 401(k) if you continue to accrue debt.
And another thing. Many employers will agree to you borrowing from your 401(k). But there’s a catch.
Like with any other loan, you’ll have to pay interest. And early withdrawal fees. Not to mention, withdrawing during retirement means you’ll pay taxes on the same money you’ve already paid taxes on, when you repaid the loan.
The bottom line is, debt and retirement do not match.
Bigger plans for retirement might imply bigger retirement savings
Last but definitely not least, what are your plans for retirement?
You have decades to think about it, so surely everyone must have at least some ideas about how they’ll spend their golden years.
Some dream about traveling full time or moving to an exotic destination. Others can’t wait to spoil their grand children all the time.
So, is your 401(k) enough to fund your retirement?
The 80% rule and 4% withdrawal sound great on paper! Everyone should have at least some insight on where to begin when it comes to retirement savings. But will it be enough to fund your golden years in the way you’ve always dreamed of?
What do you think?
Is a 401(k) enough to fund your retirement?
Do you think it’s wise to look into other options as well?