Do I need a 401(k)?

Whether retirement seems like a lifetime away or it’s right around the corner, be sure you’re financially prepared. After all, you've worked hard and deserve to relax!

 

That's where your savings comes in handy.

 

For many Americans, a 401(k) is a simple way to save for retirement without having to do it manually. It's a set-it-and-forget-it savings strategy that gives many people peace of mind.

 

But, is it right for everyone?

 

“A 401(k) can be a great resource for those thinking about retirement,” says Chad Waddoups, vice president of wealth management at Mountain America Credit Union. “Even if you're not thinking about retirement quite yet, you should start the savings process as soon as possible. Whether it's a 401(k), Roth IRA, money market or traditional savings account, your future is worth investing in.”

 

When a 401(k) may be a good choice for you:

If your company offers a match program—Some employers offer 401(k) programs, in which they agree to contribute to an employee's retirement account up to a certain percentage or dollar amount, based on how much the employee contributes. When possible, you should take full advantage of this.

 

You can essentially double your retirement savings—and who doesn't like free money?

 

You're not living paycheck-to-paycheck—If you've got a little wiggle room in your finances each month, consider putting extra money into a 401(k). Work with your employer to set up automatic deposits. That way, you don’t have to remember to transfer the money every month. That’s where the set-and-forget-it part comes in!

 

Make sure your basics are taken care of first—get your debts to a manageable level, review your health insurance coverage and save three to six months’ worth of living expenses in an emergency fund.

 

You need reminders to save money—An automated savings strategy is great for those of us who need a little help staying on top of our to-do lists. Remembering to add money to a savings account can be tricky, and 401(k)s take away nearly all the extra work.

 

You think you'll retire into a lower tax bracket—For many Americans, a 401(k) means at least some post-retirement income. Unless you're positive you'll be retiring with millions in your bank account, contributing to a 401(k) is the safer bet.

 

Most people will retire into a lower tax bracket, simply because they no longer have the same income. An out-of-site savings account can help prepare you for a lifestyle shift once you reach retirement.

 

Bonus: Your 401(k) will be taxed at a lower rate than your paychecks.

 

When a 401(k) may NOT be the best choice:

Fees are higher than 1%—Fees on a 401(k) are relatively common. Experts say you don't need to worry about any monthly service charges that come in under 1%, but anything over that should give you pause.

 

CNBC reports that the average 401(k) balance is around $103,000 and that investors pay more than $450 a year in charges.

 

Take a few minutes and do the math—look at the terms of your 401(k) and make sure you're not paying too much in fees.

 

You need immediate access to your money—If you're experiencing financial hardship, now is not the time to open a 401(k) because the money you contribute cannot be withdrawn without risking pricey penalty fees. That money should only be taken out in a true emergency or after you retire.

 

Take some time to develop a financial plan. Once you’re on stable ground again, determine how much you can comfortably save without putting yourself at risk, then start investing.

 

That being said, there may be less severe instances when you would need immediate access to your savings. If you want to buy your first home, for example, consider using a Roth IRA—which has different withdrawal rules—instead of a 401(k) to save.

 

You plan to retire before you're 60—If you want to retire before age 60, consider contributing to a savings account that doesn't penalize you for making early withdrawals. Most 401(k)s require that you wait until you're over 59 years old to withdraw money without being charged a fee.

 

There's a lot of personal choices that go into saving and investing money. If you're still not sure where you stand on 401(k)s, you're not alone. Schedule a meeting with a financial planner today and ask if it's the right type of savings account for you.