More Misconceptions of the 401(k)

What has been reported in publications including U.S. News and World Report, The Motley Fool and MarketWatch is true: Anyone who invests in a 401(k) as a retirement planning option will be eligible to contribute $500 more to it next year if they so choose. As of January 1, 2015, the elective contribution limit that an individual can contribute to a 401(k) plan on a tax-deferred basis is being raised from $17,500 to $18,000. To some people, this all sounds like great news – but we assure you, it is not. More on that in a minute.

First, let’s address the catch-up contribution, which applies to baby boomers who are preparing to retire. The catch-up contribution is the contribution employees age 50 and over can make to their 401(k) accounts. In January 2015, the limit on this contribution will also increase by $500. It will climb from $5,500 to $6,000, and that will be on top of their regular contribution limit of $18,000. So workers in their 50s will be able to contribute a maximum of $24,000 to their 401(k) retirement accounts on an annual basis – but just like the earlier news on contribution limits, this is not necessarily good news either.

If you have seen news reports that tout the introduction of these new limits as a victory for retirement planning, we encourage you to take them with a grain of salt. Think about it: Can you live on $18,000 to $24,000 a year? Of course not! Remember, one of the biggest misconceptions of the 401(k) is that you can successfully live on it during retirement. We promise you: Very few people are living well in retirement on their 401(k) income alone. So as you can see, the idea of new limits on 401(k) contributions being good news for workers is may not hold true no matter what age you are.

But honestly, it’s even worse news for baby boomers. If you are saving for retirement in your 50s, we’re here to tell you that adding more money to your 401(k) now may not be the best idea. Financial media has taught that us the catch-up provision is a great innovation – but the truth is, it’s only helpful if tax rates are lower in retirement. Remember, tax rates are usually much higher in retirement because retirees no longer have dependents, house payments and other tax deductions. By contributing more to your tax deferred 401(k) after age 50, you are raising your taxable income even more, which raises your taxes the moment you retire. But as you know, lifestyle is driven by income – so if your income is lower, you will have to sacrifice lifestyle.

That seems like a quandary, doesn’t it? But it really isn’t, if you can find retirement income streams that have enough advantages to outweigh the drawback of taxation. That’s where products like actuarial assets come in, which allow you to earn more from them as time progresses, while offering you a guaranteed rate of return and paying out regular, predictable guaranteed income streams you so that you can benefit from a consistent source of income in retirement. There are even some assets that provide a sum to your beneficiaries when you pass on.

If you have a 401(k) plan through your employer, that’s fine – but to achieve a comfortable lifestyle when you stop working, you may want to consider supplementing it with other retirement income streams. A great advisor to help you find these retirement income opportunities is a CERTIFIED FINANCIAL PLANNER™ professional, because this is a person who is licensed to offer reliable advice on personal finance – and, a professional who is highly regulated by the government. When you contact us to request a complimentary meeting, you can speak with a CERTIFIED FINANCIAL PLANNER™ professional that meets these criteria. Our team will be happy to dispel the misconceptions of the 401(k) and provide you with suitable retirement planning services.

These concepts were derived under current laws and regulations. Changes in the law or regulations may affect the information provided.

Life insurance should be purchased by individuals that have a need to provide a death benefit to protect others with insurable interests in their lives against financial loss. Life insurance is not a retirement plan, investment, or savings account.