401k By Itself Is Not Enough
Growing evidence suggests that finding out how much money you need for your retirement is a key part of the process. Simply aside a portion of your income in an employer-sponsored 401k (or equivalent) or your own individual retirement account (IRA) is a prudent step, but it’s not enough.
The general rule is that you’ll need to have enough savings in addition to your 401k account or IRA to generate at least 70% of your pre-retirement income during retirement. This calculation often involves using the 4% rule, where you assume a withdrawal rate of 4% in your retirement years to generate income equal to 70% of your pre-retirement income.
The problem with this calculation though is that it doesn’t take into consideration any gaps in your Social Security and pension benefits. If you happen to have worked for several employers, the amount of Social Security benefits you receive may be quite a bit lower than what it could have been if you had retired with the same employers.
It’s Nice Having Options
A 401(k) is definitely a solid choice for retirement. And due to the tax benefits, it can be a better choice for your retirement than a traditional IRA. But there are other choices available as well. The tax benefits are the same, and you can use a combination of the different types of accounts for your retirement fund.
For example, one strategy you could potentially use is to max out your 401(k) at work and then fund an IRA on the side. Making 401(k) contributions come tax time is much more convenient than having to decide on a regular basis whether you want to contribute to the 401(k) or an IRA. If you have the choice, you should opt for the automatic deduction.
Fortunately, you aren’t limited to just one choice. And because the main difference between the different accounts is the amount of money you can contribute per year, you can basically mix and match them to create a retirement plan that really works for you.