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Disadvantages of using only a 401(k) for your retirement & why it may not be enough.

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Disadvantages of using only a 401(k) for your retirement & why it may not be enough.

A 401(k) is a great way for retirement savings accounts for a lot of people. It’s very user-friendly and understandable since your employer manages it. 

It offers some great big tax breaks and your employer might even contribute some extra free money into your 401(k) if the company you work for matches the contributions. 

If you get an employer matchup, you should always look to achieve a maximum contribution to enable a full account before you think of using any other retirement accounts. After all, missing out on any free money isn’t the best financial move. 

But once you’ve earned that full employer matchup, there are some very good reasons to think about discovering other retirement options.

Let us explain 3 of the biggest disadvantages to relying on just your 401(k)

You could get stuck with hidden fees. Any kind of fee is never fun for any investors, as like inflation they erode your returns. Retirement investors who leave their money in a 401(k) account for decades on end,  will soon discover the cost of fees can be astronomical, as they strangle money from your account year after year.

Most 401(k) account fees are pretty low, so that´s a bonus however recent research from Employee Fiduciary showed the average all-in fee was around 1.18% for 2021, this was overshadowed by the bad news that Employee Fiduciary also established around 76% of 401(k) plans incurred hidden further administration fees. 

If you would like to find the truth of the fees you’re paying, you should inspect the 408(b)(2) fee disclosures that your plan provides. You could uncover fees that are higher than you’re comfortable paying and this in itself would be a massive drawback of solely relying upon a 401(k) as your sole retirement plan.

That’s especially true as a growing number of brokers have been working to eliminate commissions and other costs, which may mean investing in an IRA with a discount broker is a lot more cost-effective.

A higher tax bill, surprised.

If you only have entry to the traditional 401(k) and not a Roth IRA( individual retirement account) continuing with that as your sole retirement account would mean making all your contributions with pre-tax dollars. That may sound like a good thing until you consider that all your distributions from that account will be seen as a taxable income for a retiree. 

If you believe you’ll be in a lower tax bracket in retirement than when you’re in emapñyment, an up-front tax break may seem like a great deal but again remember tax rates are at historic lows for now, and with large government deficits with extreme recent spending due to Covid19, it’s inevitable rates will have to go up eventually to pay for the rising deficit and debt. 

This could very well happen before your retirement, so your future tax rate could end up a lot higher than originally anticipated. Once exceeding a certain threshold you also need to consider that Social Security benefits also become taxable. Any distributions from a traditional 401(k) count in this income calculation, but distributions from Roth accounts don´t

You could be limiting your investment return

Most people with a 401(k) are allowed to choose their investments from a small pool of assets that are likely to consist of index funds. 

Since index funds do conclude purchasing a small stake in various assets, it’s very unlikely they are going to outperform the market by much. While these investments are less risky than others, such as individual stocks or cryptocurrencies, there is also a limit to greater potential returns. 

If you want to choose your retirement investment options from a larger pool of potential assets, then it won’t be permitted to put all your retirement funds into a 401(k). Before taking on additional investments and risks, it’s great to have a better understanding and knowledge, so that you won’t be putting your future security at risk.

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