If you have a 401(k) that you’re contributing to through your employer, you may think your retirement needs are covered. Unfortunately, while a 401(k) is a good option, that alone might not be enough for a comfortable retirement.
“A 401(k) is a solid foundation for retirement savings, especially with employer matches,” said Ryan Jacobs, the founder and managing partner of Jacobs Investment Management, LLC. “Being proactive and diverse in your retirement strategy is crucial to ensure you enjoy the retirement you’ve always dreamed of.”
Here are nine reasons you need more than a 401(k) to fund your golden years.
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Income Tax Is Due Upon Withdrawal
“In most cases, the 401(k) is pretax and so the balance that you see is not necessarily what you can spend to cover cash flow needs,” explained Jamie Upson, owner and financial advisor of Stonehearth Capital Management. “For example, if a family needs $3,000/month to supplement their income needs, then they likely need to withdraw $4,000/month to account for taxes.”
Limited Annual Contributions Are Allowed
Upson said that 401(k) accounts have limits on how much you can add to the account each year.
“As a result, it is rare to see 401(k) accounts with large balances, say $5 million,” he said. “Therefore, the more cash flow that a family needs in retirement, the more likely it is that the 401(k) won’t be enough. Therefore, wealthy families typically need other types of accounts or savings to fill the void.”
Lack of Diversification
“The diversification that a 401(k) often lacks further underscores the need for supplementing savings elsewhere,” said Steven Kibbel, a certified financial planner, entrepreneur and financial advisor at Prop Firm App. “Having just one ‘bucket’ exposed to a single sector, region or asset class puts too many eggs in one basket. Without spreading funds across different investment types and locations, downturns can more easily threaten the whole portfolio.”
Market Volatility’s Impact on 401(k) Growth
Michael Schmied, a senior financial analyst at Kredite Schweiz, said that while 401(k) plans offer tax advantages and employer contributions, they often rely heavily on stock market performance.
“Market volatility can impact the growth of your savings, potentially leaving you short of your retirement goals,” he said.
Rising Living Costs
“The cost of living keeps going up, which means your savings need to grow, too,” said Jacobs. “Relying solely on a 401(k) might not be enough to cover these increasing expenses, especially if you end up having a longer retirement than planned.”
Estate Planning Issues
Jacobs said that 401(k)s can be tricky, from an estate planning angle.
“They have required minimum distributions (RMDs) starting at age 72, which can complicate your financial picture,” he said. “Plus, passing on 401(k) funds to heirs can lead to hefty taxes.”
Other Tax-Advantaged Savings Options Are Available
“Both Traditional IRAs and Roth IRAs offer additional tax-advantaged savings options,” said Angela Ashley, a registered investment advisor with Unique Investment Advisors. “Traditional IRAs allow pre-tax contributions (taxed upon withdrawal), while Roth IRAs use after-tax contributions (tax-free withdrawals in retirement). IRAs have separate contribution limits from 401(k)s, allowing you to save more annually.”
Taxable Investment Accounts Can Complement 401(k)s
Ashley said that while taxable investment accounts lack the tax advantages of retirement accounts, they do offer liquidity and flexibility.
“They can complement retirement savings by providing additional funds for goals outside of retirement or bridging income gaps,” she said.
Extra Benefits from Supplemental Retirement Plans
“A LIRP, or a Life Insurance Retirement Plan, is a financial strategy that combines elements of life insurance and retirement savings,” said Ashley. “It allows individuals to invest money in a life insurance policy that accumulates cash value over time, which can then be accessed in retirement. The primary benefits include potential tax advantages on growth and withdrawals, as well as the ability to provide a death benefit to beneficiaries. LIRPs are specifically designed to offer flexibility and additional retirement income beyond traditional pension plans or 401(k)s.”
