October 14, 2020
By Rahul Iyer
Millions of Americans are planning for retirement by investing in their 401(k)s, thereby ensuring a more comfortable future. But is your 401(k) enough, or should you also be saving? That's what we're going to be looking at today. Let's take a look.
401(k) plans can be a great way to save for retirement. Most financial advisors will encourage you to invest in your company's 401(k), especially if the company offers to match your contributions. Matched contributions are free money, and who turns down free money? People who don't like money. There are also certain tax advantages to investing in 401(k)s, namely that they are tax-deferred, meaning you won't pay tax on any earnings until you withdraw them from the account when you retire.
However, there are drawbacks to 401(k)s and reasons why investing in one might not be the best option for you. It's important to note that the things we're going to talk about in this section won't be drawbacks for everyone, but they will be for some people.
401(k)s lack flexibility and are often incredibly restrictive. Most 401(k)s focus on mutual funds or exchange-traded funds, which are highly diversified forms of investing. You can't pick individual stocks in mutual funds or ETFs, limiting your control over your investment. If you have a good investment history and like playing the stock market, then you might be better off putting your money into an IRA and investing it yourself when you're ready. This is especially true if your company doesn't match your contributions.
It should come as no surprise that most Americans aren't saving enough money towards retirement. According to a study by the National Institute on Retirement Security, over 75% of Americans have savings below conservative savings targets. Even more alarmingly, 21% of Americans aren't saving at all. So how much should you be saving?
Most estimates say you should be saving around 15% of your annual income. Ideally, it would be best if you started doing this at 25, or even earlier. This figure is based on you being able to maintain your lifestyle during retirement, which typically means you need somewhere between 55% and 80% of your pre retirement income. It's important to note that other retirement savings can also count towards this 15%, including a 401(k). Meaning, you don't need to save 15% every year in addition to your 401(k) and other investments.
The earlier you can start saving for retirement, the better, but saving at any age is still good. If you're in your 20s and have just entered the workforce, then saving for retirement might not seem like a priority. In your 20s, you're still getting to grips with all of the living expenses that are coming your way. You might be thinking of saving for a downpayment on a house. You may also have debt that you want to pay off. In this scenario, you should still enroll in your employer's 401(k) and just invest small amounts.