Why Your 401(k) Isn’t Enough!

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No matter your age you hear about 401(k)s and IRAs, retirement investment accounts. You hear over and over that you need to be ready for retirement. You need to know your nest egg number. You need to save and invest now so that you’ll be comfortable later. You’ve probably seen the charts that show if you contribute steadily starting in your twenties, you will be a millionaire by the time your 65 years old. So nothing to worry about right, we can all be millionaires by getting a 401(k) and IRA? Uhm, think again. Just a 401(k) isn’t enough!

 

Don’t get me wrong retirement accounts are important and I strongly advise that you start or keep a 401(k) and IRA. They are a crucial part of building the wealth needed to survive and thrive after you stop working. However, there are two problems with these charts that are kind of glossed over regularly. One the average person doesn’t start a retirement account as soon as they start working full-time. In the U.S., 77% of all financial assets are held by people over 50 years old. Most people in their twenties aren’t thinking about starting a retirement account, you know because retirement is really far away.  So the pretty, logical chart that shows you becoming a millionaire by age 65 with the benefits of compound interest…already doesn’t fully apply. You’re likely starting later. Therefore, you have to work much harder and save much more than that mythical person. At least there is usually a column that shows you won’t ever catch up. After all, you can only add $17,500 to a 401(k) if you’re less than 50 years old and $23,000 if older than 50 years.

 

The second thing is that the amount they say you will need is more often than not based on your current income. Well, most people I talk to want to live it up in retirement. Do you have plans to travel to places you’ve never been? Experience foreign lands? Eat exotic foods? Spoil grandchildren? Well if you follow the rule that you’ll only need 70 – 80% of your pre-retirement salary for retirement then you’re in for a rude awakening. If you want to enjoy more luxuries in retirement than you do now, you will need more money than you have now! Especially if you factor in that your expenses may actually go up. Many couples who retire have parents that they look after and pay their medical bills and living costs. You’re likely to have medical costs that will not be completely covered by Medicare or other insurance.

 

Ok, but it’s not all gloom and doom. There is a simple way to make sure you don’t fall in that boat and you build enough wealth to live comfortably.  Diversify. Diversiy. Diversify your investments. You need more than a 401(k). Make sure to open an IRA. Also, explore and delve into individual stocks and a mutual fund. Check out real estate. Have a conversation with a financial advisor to make sure your portfolio is diversified in the best manner for your situation and risk tolerance. Put 20% of your income towards saving and investing and you’ll get there.

 

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Photo credit: Green Head

About Dr. Maria James

Dr. James, The Money Scientist, has expertise with designing income management, debt management, and wealth strategies to help you live your best life. She is the founder of Pocket of Money, LLC and the creator of The Wealth Protocol™. Dr. James has also been a guest financial expert on ESSENCE, WEAA, Madame Noire and more.

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