Is it still smart to put money in 401k?
Okay, here's a quick refresher: 401(k)s are employer-sponsored retirement plans that make it easier for employees to save for retirement. They're a great way to save for retirement because they come with special tax advantages and most employers offer a company match on your contributions (which is free money).
The value of 401(k) plans is based on the concept of dollar-cost averaging, but that's not always a reliable theory. Many 401(k) plans are expensive because of high administrative and record-keeping costs. Nonetheless, 401(k) plans are ultimately worth it for most people, depending on your retirement goals.
Don't reduce your 401(k) contributions, or the allocation of new savings to stocks, just because the stock market is struggling at the moment. In fact, a bear market is often the right time to increase the percentage of income you contribute to your 401(k) if you can afford to do so.
The odds are the value of your retirement savings may decline if the market crashes. While this doesn't mean you should never invest, you should be patient with the market and make long-term decisions that can withstand time and market fluctuation.
If you're employed with a company that offers a 401(k) plan and you are not participating, reconsider! Consistently contributing to a 401(k) throughout your working years can help create a secure retirement.
Key takeaways
Prioritize savings if you don't have an emergency fund. Consider investing what you can if you're eligible for a 401(k) match. Choose saving over investing if you'll need the cash in the near future.
So to answer the question, we believe having one to one-and-a-half times your income saved for retirement by age 35 is a reasonable target. By age 50, you would be considered on track if you have three-and-a-half to six times your preretirement gross income saved.
Highlights of changes for 2024. The contribution limit for employees who participate in 401(k), 403(b), and most 457 plans, as well as the federal government's Thrift Savings Plan is increased to $23,000, up from $22,500. The limit on annual contributions to an IRA increased to $7,000, up from $6,500.
It may take some courage, but increasing your contributions to retirement accounts during a recession can be a great financial move. You benefit by buying a lot more when prices are down, setting your portfolio up for future success when the economy recovers.
“We believe the key thing to do is to keep your 401(k) funds invested. If you take them out of the market, you may lock in losses and could miss out on opportunities for market rebounds.” Here are some other ways to protect your hard-earned 401(k) when the market heads south.
How do I protect my 401k from an economic collapse?
- Continue contributing to your 401(k) plan. ...
- Maintain a well-diversified portfolio. ...
- Consider investing in defensive stocks. ...
- Opt for value over growth stocks.
“Rich Dad Poor Dad” author Robert Kiyosaki isn't a fan of traditional retirement savings plans because he doesn't think they are a safe place to park your money. In a recent tweet, he predicted that 401(k) plans and IRAs will soon be “toast,” and shared that his previous predictions have usually come to fruition.
A general rule of thumb says it's safe to stop saving and start spending once you are debt-free, and your retirement income from Social Security, pension, retirement accounts, etc. can cover your expenses and inflation. Of course, this approach only works if you don't go overboard with your spending.
One major advantage of a 401(k) is that it allows for easy, consistent contributions, and your employer may offer to match your contribution. Accessing money before retirement could also result in high fees and penalties, and you might have to pay higher taxes in retirement.
Putting money into a 401(k) doesn't make sense if you turn around and pull it right back out again. According to a recent TIAA-CREF survey, nearly a third of Americans have borrowed from their retirement account at some point. Approximately 35% of those who took out a retirement loan did so to cover emergency expenses.
We recommend investing 15% of your gross income to save for retirement (that's Baby Step 4, by the way). So if you're 100% debt free and have an annual salary of $150,000 or more, you could max out your 401(k) simply by investing your entire 15% through your workplace retirement plan.
The average 401(k) balance rose to $107,700 by the third quarter of 2023, up 11% from the year before, according to the latest update from Fidelity Investments, one of the largest retirement plan providers in the nation.
Most financial advisors say it's better to contribute some money to your company's 401(k) — even if it's a seemingly trivial amount each month — than to do nothing. Don't have a 401(k)? An individual retirement account (IRA) offers some of the same advantages, but you can open one without employer sponsorship.
The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals.
If you have $400,000 in the bank you can retire early at age 62, but it will be tight. The good news is that if you can keep working for just five more years, you are on track for a potentially quite comfortable retirement by full retirement age.
How many people have $1,000,000 in retirement savings?
However, not a huge percentage of retirees end up having that much money. In fact, statistically, around 10% of retirees have $1 million or more in savings. The majority of retirees, however, have far less saved.
Let's walk through the scenario. With $300,000 planned for your use as a retiree, a retirement age of 50, and an anticipated life expectancy of 85 years, you need that money to last you 35 years. This should mean that your yearly income is around $8,571, and your monthly payment is around $714.
Key Takeaways
An overcontribution is any amount that someone sets aside to a tax-deductible retirement plan that exceeds the maximum allowable contribution for a given period. The IRS imposes a 6% penalty for each year that any excess amount contributed remains in a retirement account until it is rectified.
The SECURE Act 2.0 requires most companies to enroll eligible employees into the company's retirement plan automatically. Beginning in 2025 Section 101 states that employers starting a new 401(k) or 403(b) plan must automatically enroll eligible employees at a contribution rate of at least 3%.
The IRS allows penalty-free withdrawals from retirement accounts after age 59½ and requires withdrawals after age 72. (These are called required minimum distributions, or RMDs). There are some exceptions to these rules for 401(k) plans and other qualified plans.
