Many financial advisors don’t question the 401(k) but financial advisor Bevan Wilde, Wall Street Journal writer Robert Powell and Forbes’ Richard Eisenberg all do.
Modern thought is beginning to lean away from a one-size-fits-all model in retirement planning. “In some cases, investors would be better off foregoing traditional retirement plans for other avenues,” said Bevan Wilde.
When compiling a list of the most common retirement advice, chances are good that retirement plans will feature highly on the list. However, these plans are not always right for everyone, and some people would be better served by putting their money elsewhere.
Often people don’t consider tax status when making a retirement plan. Robert Powell advises to look at this first and make an educated guess. The right retirement account depends on both the longevity of someone’s contributions and their tax rates.
Why is someone’s tax bracket important? If someone intends on relatively being in the same tax bracket between now and retirement, then a 401(k) will make sense over stocks or other options. The math works in most examples because of the taxes paid on stocks.
However, if someone’s tax rate rises between initial investment and retirement, a 401(k) may not be beneficial. When it’s time to receive Social Security, 85% of those benefits can be taxable. Because of that, people will want to try and keep their tax bracket down. A Roth IRA would make more sense then in that case.
A Roth IRA is also better if money needs to be withdrawn early. They do not charge the steep penalties that a 401(k) does. In fact, they are penalty free.
Richard Eisenberg points out that 25% of people with a 401(k) have withdrawn money for non-retirement expenses. That is up from 18% in 2008. Lower income families, those that earn under $50,000 annually, are most the likely to withdraw because of needing cash for emergencies.
The bottom line is that a 401(k) makes sense for a lot to investors but not all. Those with a low income, those who could have an increasingly larger income over time and those that are contributing for a long period of time all may benefit from other solutions. The point that Bevan Wilde, Richard Eisenberg, Robert Powell and other analysts have been making is that retirement plan deserve a closer look because after all it is someone’s future.