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Save YOUR Way: 4 Alternatives to a 401(k)

Save YOUR Way: 4 Alternatives to a 401(k)

September 22, 2022

If you haven’t already noticed, the days of pensions are over. We’re in a new age of retirement planning.

According to Due.com, pension plans have their pros and cons:


PROS

  • Burden of investing falls on the employer, not the employee. 
  • Employers also take on the burden of risk involving how the fund is invested. 
  • Benefits to the member or employee are fixed. 
  • Members receive payouts from the day they retire until their death (and longer, if they select an option that continues payments to a surviving spouse or beneficiary). 

CONS

  • Employees have no control over how their pension money is invested. 
  • Company failure could lead to bankruptcy and reduction in employee pension benefits.
  • Not all pensions transfer if you change employers. 
  • They’re difficult to access.


Let’s focus on this point when it comes to this change in saving for retirement: employees now have control over how their money is invested.

More and more young people are aware of and participating in 401ks than ever before, likely due to automatic enrollment upon being hired.  I believe that this has also led to an increased awareness and interest in learning about investing and retirement planning.

And while the 401(k) often seems like the obvious choice, there are other factors to consider before putting all your eggs in that basket.

  • Since there is the potential for tax rates to be higher in the future, you might want to investigate establishing and funding a Roth IRA if your employer offers no matching contributions within the company-sponsored 401k.
  • If the employer offers a matching contribution, you might want to consider contributing up to the amount of the employer match and then look at contributing excess salary/money you may have into a Roth IRA.
  • It’s also wise to take a look at a Roth 401k option (if offered) within your 401k to allow their retirement account to grow tax-free.

 

4 Alternatives to a 401k

If the employers’ plan does not have a match, offers limited investment options, or the investment options provided charge above average fees, it may make more sense to save for retirement on your own using alternate options.

  1. Traditional IRA – like the 401k in that it offers the ability to lower before-tax income
  2. Roth IRA – the preferred way to save for retirement if lowering pre-tax income is not a significant consideration. This plan allows the retirement savings to grow and be used 100% tax-free, if used within the established IRA parameters.
  3. Health Savings Account (HSA) – like a traditional IRA or 401k since it allows the participant to contribute with pre-tax income. Contributions can be withdrawn tax-free for qualifying medical expenses or can be invested for retirement and used like a traditional IRA.
  4. Overfunded life insurance – for those who have a life insurance need, special policies can be designed that allow you to save additional money tax-free over and above the minimum premium. There are generally no requirements that mandate this money be used exclusively for retirement.  Some use this approach to save for a child’s education expenses or other expenses that may occur over their working career.

Don’t get overwhelmed! Ask questions.

We offer people the ability to hold a free, no-obligation initial consultation to review your current plan and decide if a second planning meeting is appropriate.  Our website also offers a lot of great educational resources, as well as the ability for someone to schedule an initial consultation.