Not Everyone Is Thrilled with 401(k)s
Retirement plans, such as a 401(k), allow you to plan for later years. However, they aren’t free.
Retirement options are a wonderful opportunity as one plans for their later years following a long employment history. However, it is best to be wary and not just follow the herd, according to Born2Invest in “Retirement planning: The downsides of your 401(k).”While it is not your standard, everyday view, it might be wise to take it into consideration as you plan for the golden years.
The article notes that historically, retirement as a concept is relatively new. People just worked as long as they were able to. In 1881, Otto Van Bismarck petitioned for the creation of a government system to support the elderly and the concept of a social security system was created. Their retirement age was 70—the same as life expectancy. In 1935, the American Social Security system was created. For a few generations we worked, we saved, we got pensions from employers and when we celebrated our 65th birthday, we retired.
That world has passed. The Revenue Act of 1978 created the 401(k) and defined benefit plans went away as corporations passed the burden of saving and investing for retirement to employees. There is now a huge industry of employer-sponsored, employee-funded retirement plans with assets of more than $7.7 trillion. IRAs hold more than $8.6 trillion.
Why does that stink? One of the benefits marketed by 401(k) providers is that they allow owners to defer income and taxes. However, “defer” doesn’t mean they are tax free. You’ll pay taxes when you take the money out. To be sure that you do, there are Required Minimum Distributions (RMDs). You’re taxed not just on the distributions, but also on the investment gains.
The traditional thinking is that you’re going to retire, your income will decrease and so you’ll be in a lower tax bracket. But will it? If your combined income from Social Security, pensions and RMDs send you into a higher tax bracket, you may be paying more in taxes. This is especially true, if you have lost the deductions: kids growing up, no mortgage and no pre-tax contributions.
Your retirement funds are supposed to be just for retirement. However, sometimes there are bumps along the way and, if you have no other assets, that’s where you’ll go at a high price.
401(k)s have limited investment options and you’re typically limited to mutual funds and sometimes to Exchange-Traded Funds (EFTs).
Those retirement plans are not free. A 401(k) has high administrative costs and underlying investments have fund fees, based on the companies and their management activity.
An estate planning attorney can advise you in creating an estate plan that fits your unique circumstances, as well as the options as you look toward retirement.
Reference: Born2Invest.com (Sep. 13, 2018) “Retirement planning: The downsides of your 401(k)”
