Myth #1: The 401(k) replaces all other necessary sources for income for retirement.
Although 401(k)plans are the main source of income during retirement, they were originally just one part of a tripod intended to provide individuals with three base pillars of support to comfortably retire, with the other two components being social security and defined benefit pension plans. With the uncertainty of social security for aging baby boomers and pension plans becoming a thing of the past, 401(k) plans have gained in prominence. In addition, the cost of pensions for employers became a burden, and 401(k) plans became a welcome alternative as it allowed the employer to avoid contributions or as in most cases, offer some kind of matching plan — a much less expensive option than a pension plan. With social security facing an uncertain future, it remains to be seen whether the program will be able to provide retirement income in the coming years. The situation is no different with pensions as they are rapidly becoming a relic of the past. It’s these factors that make a strategic retirement plan more important than ever.
Myth #2: The tax-deferred treatment of 401(k) plans means that investors will pay less in taxes.
The tax-deferred treatment of 401(k) plans is often viewed as a big positive to plan participants.
Even though the account is still taxed, it is taxed at a later date. Proponents of 401(k) plans maintain that a notable benefit to 401(k) plans is that upon retirement many people do not need the annual income they did when working, so the effective tax bracket for an individual is likely to be lower in their retirement years because their amount of income will decrease. However, as tax rates fluctuate over time, it’s important to save as much as you can in the event you pay more in retirement taxes that originally planned.
Myth #3: 401(k) plans provide access to the best investment options available.
401(k) plans usually offer many options which an employee can choose from. It is wise to remember that the investments offered in a plan may be there because the issuer of the fund paid the plan administrator to have them included— not necessarily because they are the best investment options available. In these types of situations, and because employees are getting more and more options for investing, your financial advisor can help you determine which available options are the most suitable alternatives to minimize the risk exposure within the plan.
Questions? You can call Mooney Lyons at 1-847-382-2600, or visit us at: mooneylyons.com. We can help ease the complexity and manage the anxiety in many areas of retirement planning — so you can focus on pursuing a future built on good financial sense.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.