Are 401(k)s Setting Millennials Up For a Pain?


This is a good article for those in their 20’s and 30’s that are contributing to a 401(k) or other employer-sponsored retirement plan. Many people this age set aside a portion of their paycheck into these qualified plans without much education or guidance on where to invest it, what funds to pick, how much to contribute, etc.
Consumer education is highly lacking in this field. For this reason, as the linked article below mentions, many people are either defaulted into or encouraged to invest their earnings into a Target Date retirement fund. These funds usually have a target retirement date as 2045, 2050, 2055, etc. These funds are simply a calculation on risk management on how much of a percentage of the fund is stocks and how much is bonds, based on the outlook of estimated retirement date. These funds for those in their 20’s and 30’s with 30 plus years to retirement are very heavily weighted in stocks (equities), which can be very aggressive.
On top of that, it turns out that the fees are usually also higher for these funds. The market has been on an upswing since the bottom of 2008, but once we have another large correction in the stock market, these millennials’ 401(k) balances will plummet with it.
We think that these plan administrators should provide more education to the HR departments and the employees directly instead of simply sending them quarterly statements in the mail with a million disclosures that basically make the document a dust collector while it sits in the mail pile before being shredded later.
One of the few things we believe the article below does not address is the other pain coming in the form of Taxation!  If you are contributing to a 401(k), it is many people’s belief that you should only contribute up to whatever the company match is and redirect your other savings elsewhere. There can be other, more advantageous, places to direct the other 3-10% savings that can also grow tax-deferred (like that of the 401k) but use after-tax dollars in order to pay NO taxes in retirement.
One of the biggest problems is large companies and government encouraging people to save all they possibly can only in 401(k) plans and at the end of the day in retirement, all your income becomes 100% taxable at whatever tax rate that may be in the future, assumedly higher, and possibly affect the taxability of your Social Security income.  There are other avenues like ROTH IRAs and Indexed Universal Life Insurance that can provide a tax-free income source.
Fixed Index Annuities can also be a great way to save for retirement tax-deferred, but will also have taxable withdrawals later. The advantage that many people get from rolling over into these is guaranteeing an income stream that you cannot outlive!
People need to get educated on these products as many financial advisors will not discuss these products with their clients for reasons not mentioned here.  But here is the big thing when it comes to retirement.  It is not how much money you have it is how much you get to keep after taxes!  Also Indexed Universal Life policies do not effect taxation of Social Security

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