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KLE 29: The death of the mighty 401k


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Common financial wisdom says to invest heavily in your retirement plan (e.g 401k in the USA, Superannuation in Australia, and Pension Plan in the UK), yet our Pay Yourself Twice plan is aimed at increasing your savings outside of your retirement plan!

But, there are two supposed advantages of investing in your retirement plan that you lose when you invest outside of that plan:

1. Tax advantages, and

2. Employer contributions (e.g. in the USA, this is called the ’employer match’)

In this KLE we’ll investigate the four reasons why your retirement plan is inadequate – even with the advantages of the tax breaks and ‘free money’ (by way of the employer match) thrown in!

In the next KLE, we’ll put the microscope on that tempting employer match.

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Reader Comments

You have left out another reason to avoid 401 k and other retirement funds at work. This reason is not so obvious to many. It is the fact that most employers don’t even know what these plans are about. In many cases, the employer is offered incentives (from the plan management companies) to offer these plans to their employees. But what they don’t know is, many of these plans invest in the worst performing of the funds.I.E. Investment companies have funds that do better than others. The money you invest ,does not usually get invested in their higher yielding funds.Your choices are also normally limited as well.

We actually have an option to self-manage our 401K, so some of the issues you mention are not a concern for me.

As our net worth and salary increase the percentage going to 401K decreases. Since we are able to save/invent 2X what we put into the 401K, I don’t fee that we should slow that down.

Makes sense. In fact I don’t add anything to my Roth IRA (don’t have a 401k as I’m self employed) I pay my self twice into my personal savings account.