Welcome to the Knowledge Center
Are 401(k)s Worth It?
Originally, a 401(k) was the most popular do-it-yourself approach to retirement savings. But like bell-bottom pants (and apparently skinny jeans now?), not everything stays in style forever. This has led to a lot of people asking: are 401(k)s worth it anymore?
401(k)s are still the most popular option among employers, but it’s up to you to answer the question of are 401(k)s worth it for yourself. So, if your employer is offering you a 401(k), is it actually the best option for your retirement plans? Well, before we ask are 401(k)s worth it anymore, we should determine if they were ever worth it in the first place…
When was the 401(k) created?
401(k) retirement plans were established in 1978 and continued to grow in popularity throughout the 1980s. But before 401(k)s, underfunded pension plans paid a predefined retirement benefit when workers retired. These pension plans depended entirely on the employer to make a contribution to a pool of funds set aside for the worker’s future benefit.
Ultimately, pension plans became too much to manage and the 401(k) came along and changed everything. Unlike pension plans, 401(k)s have no defined benefit. Instead of relying on employers to set aside funds, in a 401(k), it’s the individual employee’s responsibility to save for their own retirement.
Instead of employers having to worry about setting aside money for their workers’ retirement, they instead put the responsibility back in the hands of individuals to determine how much they wanted to save while employers would “match” whatever they chose.
So, are 401(k)s worth it anymore?
If you’re asking yourself are 401(k)s worth it, then you should start with the positives. Arguments for 401(k)s hinge on two main benefits: tax savings and employee matching programs.
Every contribution to a 401(k) reduces your income, which then decreases your tax burden. At the same time, the benefits of 401(k)s is that employers have a fiduciary duty — a legal responsibility to maximize their employee’s returns. With matching plans, employees can benefit from simultaneous contributions from their employers. Also, the high withdrawal fees associated with 401(k)s can reduce the temptation to withdraw savings for something else.
Those factors are fair, but they don’t answer the question of are 401(k)s worth it anymore. And truthfully, the main argument against 401(k)s is that they don’t adequately prepare workers for retirement, given so many are behind on savings. A 2019 study found that 75% of 401(k) savers won't have enough to maintain their lifestyles when they retire.
Not to mention, the inherent extra return participants enjoyed for many years has almost disappeared because of changes in tax laws and high fees. If you’re asking are 401(k)s worth it anymore, the answer isn’t a simple yes or no. There are plenty of factors to consider. But you can’t completely answer the question without looking at other options.
What’s a good alternative to a 401(k)?
Permanent life insurance policies have been a tax-efficient model for the wealthy for years. Why? Because permanent life insurance policies include certain benefits that make them a great way to diversify your portfolio and max out your tax efficiency. So whether you’re nearing retirement age or have a long time to save, permanent life insurance can be a great resource for retirement income.
Sure, your 401(k) grows tax-free, but once you tap into those resources, you do pay taxes as if it were any other kind of income. A permanent life insurance policy is different, and you can tap into the cash value of the policy without any tax ramifications.
If you want to learn more about how a life insurance policy could boost your savings and spare you from wasting money in a 401(k), reach out to the team at Amplify and ask any and all questions you have.
We’re happy to help you find a plan that works for you.