Is A 401k Worth It Anymore? (8 Good Reasons To Avoid It) | Wildchildretire

Key Takeaways:

• The 401k may be worth it if you retire after 59 and 1/2 years.
• If you invest in the 401k, you could encounter huge mutual fund management fees and miss out on potentially life-changing investment opportunities.
• You could use Robinhood and Betterment apps to help you invest in 401k alternatives. 

Are you likely retiring early and want to know if a 401k is worth it?

Here we’ll show you 8 good reasons why investing in a 401k might be a bad idea.

From not being early retirement friendly, penalties for early withdrawals, and more.

Let’s dive right in.

8 Reasons Why a 401k Can Be A Waste Of Money (And Time)

1. Not FIRE Friendly

If you are on the FIRE train (Financial Independence, Retire Early), a 401k will not be your best friend. The main reason is that you can only access your money once you are 59.5 years old without paying a 10% penalty. So, if your goal is to retire early, there are better ways than a 401k.

Other retirement options are more FIRE-friendly, such as a Roth IRA. With a Roth IRA, you can withdraw your contributions without penalty. So, a Roth IRA is better if you need to access your money early.

2. High Fees

In 2022 the average 401k fee was 2.2%. So let’s say you have a 401k with $50,000 in it. That means you are paying $1,100 a year in fees! And that’s just the average fee. Some 401ks have fees as high as 3% or more.

When you are trying to grow your investments, every percentage point counts. And if you’re planning on a 7% return, you can count on 3% inflation, add the 2.2% fee, and you’re already at a 2% return! So to put that in perspective, if you invested $1,000 a month for 30 years at just a 2% real gain, you would only have $492,725. But if you got a 4% real return, you would have $694,049. That’s a huge difference!

3. Missed Investment Opportunities

This is a huge one. Because if you want to retire early, you need that extra money to work for you. And the only way to do that is to invest in it. But with a 401k, you’re limited to investing in stocks, bonds, and mutual funds. So, you’re missing out on a whole world of investments, such as real estate, which can provide a much higher return.

Or you could spend a decent amount of your money learning skills, such as blogging, day trading, or even becoming a better saver. The options are endless, but with a 401k, you’re limited to investments that will not get you to your FIRE goals.

4. Limited Choices for Stock Market Investments

One of the biggest downsides of a 401k is the limited investment options. With a 401k, you’re usually only able to choose from mainly a few mutual funds, and you have no control over what those funds invest in. So, you’re at the mercy of the mutual fund managers.

And even if you have a few good investment options, you still need more in what you can invest. For example, if you’re interested in individual stocks, you’re out of luck. Or if you want to invest in crypto, it might not be easy. So, if you’re looking for more control over your investments, a 401k is not the way to go.

5. You Might Not Even Get A Match

One of the biggest perks of a 401k is that some employers offer to match your contributions. But only some employers offer this benefit. In fact, according to a Vanguard study, just over half of employers offer a 401k match. So, you could be missing out on free money!

And even if your employer does offer a match, they might only match part of the amount. For example, they may only match 50% of your contributions up to 6%. So, if you’re looking to max out your 401k contributions, you might not be getting the full employer match.

6. Not Accessible in Case of Emergency

We all know life can throw us a curve ball when we least expect it. And when that happens, we might need access to our 401k funds. But as we mentioned, if you withdraw your money before you’re 59.5 years old, you will incur a 10% penalty. So, unless it’s an emergency, you’re better off leaving your money in your 401k.

7. You Have To Withdraw Money When The IRS Says So

When you turn 70.5 years old, the IRS requires you to start taking withdrawals from your 401k, even if you don’t need the money. So, if you’re trying to grow your investments, this can be a huge setback.

The required minimum distributions (RMDs) are taxed as ordinary income. So, if you’re in a lower tax bracket when you retire, you could end up paying more in taxes than you would have if you had just invested the money in a taxable account.

8. They Are Tied to Your Employer

Another downside of a 401k is that they are usually tied to your employer. So, if you leave your job, you will have to decide what to do with your 401k. You can either cash it out, roll it to an IRA, or leave it with your old employer.

Cashing it out is usually not a good idea because you will have to pay taxes and penalties on the money. And if you’re young, you could end up paying a huge chunk of your 401k to the IRS.

Rolling it over to an IRA is an okay option if you can find a good investment platform. But it can be a hassle to transfer the money and keep track of two different accounts.

Is There Anything Better Than A 401k?

Non-Retirement Options

Robinhood

If you’re looking for an investment platform with no fees, Robinhood is a great option. You can invest in individual stocks, ETFs, and crypto without paying commissions. Plus, there are no account minimums, so you can start investing with as little or as much money as you want.

Betterment

Betterment is a Robo-advisor that offers low-cost investments and features like automated portfolio rebalancing and tax-loss harvesting. Also, you’ll get access to goal-based investing, which can help you reach your financial goals faster.

So, if you’re looking for a low-cost investment platform with no account minimums, Betterment is a great option.

FAQ

How does 401k work?

A 401k is a retirement savings account that employers offer. Employees can contribute money to their 401k retirement fund, which is then invested in various investments, such as stocks, bonds, and mutual funds. And after the retirement age of 59 and 1/2, the employee can enjoy the benefit of penalty-free withdrawals.

How does 401k match work?

The good news is that some employers offer a company match to their employees’ 401k contributions. For example, an employer may match 40% of an employee’s contributions up to 5%. So, if an employee contributes $6,000 to their 401k, the employer would contribute $2,400.

When can you withdraw from 401k?

Generally, you can withdraw without a penalty fee from your 401k after you reach the age of 59.5. However, if you withdraw money before that age, you will incur a 10% penalty.

How much money should you have in your 401k by age 55?

There is no set amount of money that you should have in your 401k by age 55. However, a good rule of thumb is to have at least enough money to cover 3-6 months of living expenses. If you don’t have that much, speak to a financial advisor or local financial experts so they can assist you with retirement planning strategies such as: lowering tax rates and tax savings on your taxable income, maximizing catch-up contributions for your individual retirement account, unique investment options for index funds selections, and overall all help you achieve a comfortable retirement.

Is A 401k Worth It for millennials?

A 401k can be a great retirement investment vehicle for millennials. However, some downsides exist, such as an early withdrawal penalty and an annual contribution limit. Bottom line, a 401k is still a good option for millennials who want to save for retirement, with matching funds and tax-deferred savings.

Summary

So, is a 401k worth it anymore? The answer may surprise you. With high fees, limited choices for stock market investments, and the possibility that you might not even get a match, there are plenty of other good money moves to make. So don’t let your retirement savings plan hold you back- explore your options and find something that works better for you!

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So after reading the article, is the 401k worth it anymore to you? Please share with us below!