Since past decade, the 401(k) has been steadily gaining popularity as a no-brainer, gold standard of retirement plans. Through it, employees make salary reduction contributions, which is either on a post-tax or a pre-tax basis. It normally has caps with a regulation limit of allowed percentage of salary contributions. It also has restrictions on the account holder’s ability to withdraw these assets or when they can do without incurring a tax penalty. Hence it certainly is not the bedrock retirement plan as touted. Some of the reasons why it should not be considered a total panacea of your retirement are –
Unconscious and Ignorant Investment
The biggest issue with the plan is that it is voluntary. It is up to each individual to decide on whether he would participate and how much and in what way, he would. This inevitably leads to the unaware and ignorant employee making a critically bad decision of his life.
No Cash Flow for Better Opportunities
In this plan, one simply puts the money away. For the next 30 years, touching it may attract penalty. This creates stagnant money left to compound unpredictably. Hence no cash flow is made ready which can be used to direct to today’s best uses. Hence better opportunities of better wealth accumulation are allowed to slip by.
Early or emergency withdrawals from 401(k) attract penalties unless one knows to safely navigate obscure IRS codes. Thus one cannot spend or invest one’s own money to enrich your life without incurring a sizable financial hit and great difficulty. Sole exception is borrowing a limited amount of money from it with the promise if repaying it back within 60 days. Thus one cannot liquidate his own assets when he may need it during an extremely critical juncture of his life.
Hence it’s best to be a conscious investor and weigh all pros and cons before moving ahead.…