401K: Not as Safe As You Think

by Justin Hong

401k Nest Egg

When you graduate from college, you may start to notice your dreams evolving from free beer to a bright, shiny new job with health benefits, paid leave, and something called a 401K. If you don’t already know, a 401K (derived from the 401(k) subsection of the Internal Revenue Code) is a retirement savings plan, in which employees contribute a portion of their paychecks to some kind of investment (typically paper assets, such as stocks and bonds). These investments aren’t taxed until the time of withdrawal/retirement and are guaranteed to at least match employee’s contributions.

While you don’t want to pass up on your benefits, and you definitely don’t want to pass up on your paid vacations, you may want to consider waiving your 401K plan. 401K regulations prohibit access to your retirement accounts before the age of 59 ½ without hefty penalizations. So if you have any desire for financial freedom (with your own hard-earned money) before the seemingly arbitrary age of 59.5, you should stay away from retirement accounts like 401Ks and Individual Retirement Accounts (IRAs).

Here’s why:

Becoming rich isn’t a lazy man’s endeavor.

By putting your extra money into a retirement account, you’re not challenging yourself to learn how to make money.  Instead, you are settling for complacency and passively waiting until your sixties to access the money you made and you saved all on your own. Shouldn’t it be up to you to decide how and when to spend these savings?

So what are your other options?

Financial Education

Your first step in battling the limitations of standard (and marginally lucrative) retirement plans is developing financial fluency. With the wealth of online financial resources, you should easily (and freely) be able to broaden your financial knowledge. While it may be time-consuming and less-than-exhilarating, putting pressure on yourself to learn more about your finances will inevitably improve those very same finances.

Diversify

401Ks and other retirement savings plans do not incorporate true diversification into their investing systems. As any smart investor knows, a diversified portfolio is key to both investment safety and success – but how you define “diversified” is important to assess here. Typical retirement savings plans rely on paper assets, such as stocks, mutual funds, bonds, etc. So what happens if the stock market crashes the year before you plan on taking your money out of retirement accounts? By investing outside of a standard retirement savings plan, you have the chance to diversify your investments to businesses, real estate, precious metals, and other financial assets – all great ways to generate cash flow and potentially exceed your financial expectations.  

Take Risks

While you may not want to take “risks” with your money by starting a business or investing in real estate, it is just as risky – if not more risky – to just blindly cede control of your investment money to the mutual funds in your retirement account.  With typical retirement savings plans, you’re not really in control of your investments.  Sure, you get to choose which mutual funds you want to invest in, but oftentimes you are not able to select the stocks, bonds, etc. that are in those mutual funds.

Instead of surrendering your money to a retirement account you can’t touch until you’re 59 1/2, you could be investing a portion of your income in businesses, stocks, precious metals, etc.  You will probably make many mistakes along the way — and quite possibly lose all of your investment money at some point — but you’ll be increasing your financial education and learning more and more about creating financial freedom for yourself.  You’ll be proactive — not just sitting back and waiting to retire with your retirement “nest egg,” which, sad to say, may or may not be there when you’re finally ready to take your money out.

 

Justin HongJustin Hong has an MBA from the Marshall School of Business at USC. Justin blogs on financial and entrepreneurial topics for eCreditCards.

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