401(k) Is Not Enough: 4 Alternatives to Your Retirement Planning

 

Nowadays, it’s disconcerting to realize how employee retirement plans just don’t seem to be enough to cover one’s retirement. The economy is facing some challenges and some volatility, and it seems that a good employee, no matter how loyal they are to a company, can still find himself his retirement funds lacking when the retirement age comes.

 

A study conducted by Retirement USA found that Americans from ages 32 to 64 are going to face a staggering retirement savings shortfall of $6.6 trillion. Aside from that, 87% of businesses during a survey acknowledged that the 401(k) they are providing for their workers would not give retirement security.

 

In the same light, according to Forbes.com, employers privately revealed that their 401(k) plans were not sufficient to provide for worker’s retirement.   Basing on these facts, it seems that even the most hardworking employee cannot rely on its company’s pension. And since most of us are at the receiving end, we need to find alternatives to protect ourselves from a bleak future of relying on either our children or social services. The best way to get a good retirement is not to be complacent with a 401(k) and start looking for alternatives that will beef up your retirement savings.  

 

Alternatives to the 401(k) Plan

 

  1. Roth IRA – Ideally it would be best to max out both your 401(k) and your Roth IRA. After all, the more you can save for your retirement, the better it is for you. However, for many people this may not be possible. So the question now is, where should you contribute first? The answer lies in investing in your 401(k) plan first, right up to the amount where your employer will match. Once the maximum match has been achieved, switch your contributions to the Roth IRA.

 

Why do this?

 

There are four reasons why the Roth IRA might be a good place to contribute next as compared to a 401(k) account. The first reason is in the fees. Most company-sponsored 401(k) accounts often offer sub par mutual funds that feature high fees, while your Roth IRA account allows you to select a low-fee ETF or mutual fund.

 

Immediately, you can see your savings right there. Second, 401(k) plans usually offer only a single choice in a given asset class. It is said that diversification or asset allocation is largely responsible for the growth of your investments, and a Roth IRA can allow you to do just that with over thousands of investment options to choose from.

 

Third, although 401(k) plans will allow you to deduct your investment from your taxable income on the current year, you will eventually have to pay taxes on the amount withdrawn in the future. On the contrary, after tax funds will be paid now, but in the future earnings are tax free.

 

The rationale behind this is that taxes are sure to be higher in the coming years so the Roth will still allow for more savings. And finally, if ever you come across a time of need, the Roth IRA will not charge you any penalty for early withdrawal while a 401(k) will have a 10% penalty.


 


  1. Non-Deductible IRA – Although most advisers suggest that the Roth IRA is a much better option than the non-deductible IRA, there are some instances wherein you cannot qualify for a Roth while still qualifying for a non-deductible IRA. A non-deductible IRA, also known as a Traditional IRA consists of non-deductible contributions. This means that if you are covered by a retirement plan or a 401(k) at work, and your modified adjusted gross income exceeds the income limit, contributions cannot be deducted to a Traditional IRA. Investments that are suited for a Traditional IRA include bond funds and REIT. Also, it is possible to convert a non-deductible IRA to a Roth IRA.

 

  1. Taxable Accounts – If you still have some money left over after you’ve maxed out both your 401(k) and your Roth IRA, you can continue to contribute for your retirement through a taxable account. These accounts include savings, certificates of deposits, mutual funds and other investment accounts. A drawback to this however, is that you will owe taxes for every year your account earns on capital gains or from profit by selling the investment.

 

However, there are also some advantages. First, there is no limit to the amount you can add to your taxable investment account. Also, there is no limit to what kind of investment you make, and there are no required withdrawals. Another advantage is that taxes on most stock dividends or long-term capital gains on investments that you’ve owned for more than a year are usually taxed less than the regular tax rate. Another point to consider is that there may be lesser fees and charges when you buy and sell investments in a taxable account than in other retirement savings plans.

 

  1. Keep Contributing to a 401(k) Then Roll Over – If you have no plans to stay with your employer for long, you can consider rolling over your 401(k) or 403(b) plan even if the cost is high and there is no match. Once you leave your employer, you can rollover the balance of your retirement account to your own IRA. Eventually the better investment options and lower fees provided in an IRA will offset the high cost of rolling over your 401(k) plan. However you do have to consider how many years you have left to pay off the high cost.

 

Each type of retirement plan has its own advantages and disadvantages. The key is in understanding just how much you will be needing upon retirement and figuring out your own investment strategy that will be enough to cover for your retirement and more.

 

Whatever your plan may be, the one advice that always rings true when it comes to retirement saving is to save early. This will allow you to max out your 401(k) and your Roth IRA while still leaving room and time to start investing in other arenas that will offer passive income and the chance to take advantage of the power of compounded interest.

 

Reader Thoughts! How would you save for the future if your employer didn’t offer investment options?

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Comments

  1. Gotta add those taxable accounts through an extra 20-35% annual savings on top of maxing out the 401K!

    • For 2012 we are dumping all our money into our emergency fund in anticipation of having a child. The game plan for 2013 and beyond is to use all non emergency fund cash on real estate and taxable accounts.

  2. My company matches half of my 8% contribution in a 401k. Together that's 12% per year. Every raise I get, most or all of the raise goes into the retirement account, instead of to my standard of living. There is a company-funded pension but it is not held by the employee so it is not guaranteed in my mind. Then i contribute to a regular Roth outside the company to the maximum allowed by law (this is allowed on top of a 401k Roth). I am NOT a high earner and live in an expensive state – i live way below my means by not in a spartan fashion and follow "minimalist" and "simple living" websites for new ideas.

    I have friends who work in big Pharma getting 6 figure paychecks, a nice 401k matches, company-funded pensions, and annual raises of $10-20k per year. The actuaries are living high on the hog too. STEM (science, tech, engineering, and math) are nice industries and you need a degree. These folks are not working 60-80 hour workweeks to earn high wages like so many blue collar workers (eletricians, plumbers, ma bell, electric/gas).

    I think there is some truth to financial advisors who say save 20-25% of your pay each year – so many ppl have lousy 401ks and no pensions these days have no alternative but to rely on their own stockpiles. Keep expenses low and put any raises to your retirement accounts.

    • PJ great job on investing in your future. You're way ahead of the game. You're absolutely right about people with lousy 401k's I am one of them. Fortunately, like you we live way below our means. We actually live off one income. So, since we have a crappy 401k. Maxing out my wife's 401k and investing in other income streams will have us well off for retirement.

  3. Just to add more intrigue to this issue, I now have the option of a Roth 401K. This is a relatively new kind of account. Not really sure which type of account to pick, the match to this account would be tax deductible which creates more accounting issues.

    • ROTH 401K ALL THE WAY. You can put in 17k after tax and never pay taxes on it again. I personally would jump all over this even though I'm in a high tax bracket.

  4. We contribute to a TSP (military/federal 401k equivalent) but as a military member (husband) we don't receive matching contributions. We started a Roth IRA fairly recently in hope of bulking up our retirement savings.

    • Great job on starting the ROTH IRA. I'm curious since you do not receive matching contributions and you're eligible for the ROTH IRA. What is your reason for contributing to the TSP prior to maxing out both of your ROTH IRA's?

      • Funny that you ask that, because I have been asking myself that question.

        We started contributing to it about 7 years ago and at that time we were not as on top of our financial situation as one should be but I was led to believe that the contributions were matching. I only found out a while ago that they were not. BUT I completely understand why since the military has fantastic retirement benefits. I just never changed our contribution because it's taken out before we even see the paycheck and I thought it was a good thing to save.

        We recently got ourselves out of almost $15k of debt and I wanted to keep contributing to retirement even while in debt.

        So, my answer is I am kind of lazy and maybe I should look into maxing out a Roth with those contributions rather than putting them into a non-matching TSP. Thanks :)

        • Roth vs tax deferred retirement accounts (without match) comes down to what you believe your tax bracket will be in the future. Say you're in the 15% bracket now and expect your tax bracket to be 25% at retirement. The Roth makes since. If you're in the 25% bracket and expect our tax bracket to be 15% in retirement the tax deferred plan makes since. Good luck on planning :-). All in all if you can max out both you're way ahead of the game. Also don't forget Roth IRA's are individual accounts so you and your husband can both contribute to two separate Roth's for 5k each

          • Thanks for the info. I really have no idea what tax bracket we'll be in.

            We do have separate accounts. I am a huge advocate of the stay-at-home parent having IRAs too.

  5. The participation level in most 401k's is terrible! Savings in general is not what it should be. We need to increase the participation before you condemn it. Although I contribute to a Roth IRA, I do not believe I will be in a higher tax bracket when I retire. I guess I can only hope I will! :)

    • The government is trying to increase participation but many employers are foregoing safe harbor matches and simply offering a 401k with no match. This leaves people in a pickle. For example at my job since there is no company match many people do not participate. I'm considered a key employee by definition because of my salary exceeding 110k. Key employees cannot invest more than 2% over the average non-key employee deferral amount. Meaning, if non-key employee's on average invest 2% to their 401k. I can only invest 4%. This isn't going to cut it! for my retirement. Not to mention my 401k investment options are horrible. :-(

  6. If I didn't have the option of a 401k at my next job, I would try to max out my IRA and then contribute to a taxable account, probably a combination of stocks/mutual funds and something less risky.

    • Good plan. What about bonds? Would you take advantage of the tax favorable municipal bonds?

      • You know, it's not a very precise plan for a theoretical situation. :-) I'm in the middle of finals so I don't have time to flesh it out, but I won't have real income for another 5-6 months and when I do I'll have a 401k so after I max out my matching funds I doubt I'll have enough left to fully max out my Roth IRA.

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    401(k) Is Not Enough | Your Finances Simplified…

    Nowadays, it’s disconcerting to realize how employee retirement plans just don’t seem to be enough to cover one’s retirement. The economy is facing some challenges and some volatility, and it seems that a good employee, no matter how loyal they are to …

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