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LEARN MORE ABOUT: 401k Plans
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When Your 401k Savings HURTS You
A 401k retirement savings plan is often hailed as one of the best ways to secure a comfortable and financially stable future. It allows individuals to set aside a portion of their income before taxes, letting it grow over time with the intention of enjoying these funds at retirement age. However, there are circumstances in which the very existence of a 401k can turn against you and negatively impact your financial situation. Here, we explore some scenarios in which your 401k savings may hurt you.
1. Early Withdrawal Penalties: One of the most significant drawbacks of a 401k is the hefty penalties associated with early withdrawals. If you tap into your retirement savings before the age of 59 ½, you not only have to pay regular income tax on the withdrawn amount but also a 10% penalty. This can significantly reduce the funds available for your retirement.
2. Insufficient Diversification: Many employees tend to leave their 401k investments on autopilot, unaware of the specifics of their portfolio. This lack of active management can lead to a lack of diversification, which means your retirement savings could be concentrated in a small number of stocks or bonds. If these investments perform poorly, your entire retirement fund could suffer.
3. High Fees and Expenses: 401k plans are not immune to fees and expenses. Often, people fail to read the fine print and understand the costs associated with their investment options. High fees can eat away at your returns and diminish the growth potential of your savings over time. It’s crucial to review and compare the fees associated with different investment options within your plan to make informed decisions.
4. Market Volatility: The ups and downs of the stock market can have a significant impact on your retirement savings. If you are close to retirement and experience a market downturn, it can be devastating for your 401k. Selling your investments at a low point in the market will lock in losses, as opposed to leaving your money invested for potential recovery.
5. Unpredictable Taxes: Though contributing to a 401k can provide immediate tax advantages, it’s important to remember that taxes are only deferred, not eliminated. When you withdraw funds from your retirement account, you will pay income tax on the full amount, including any earnings. This can lead to an unexpectedly high tax bill in retirement, especially if you have been diligent in saving.
To ensure your 401k savings work for you and not against you, it is crucial to regularly review and reassess your investment strategy. Take the time to understand the fees involved, diversify your investments, and seek help from financial professionals if needed. Consider all factors that may impact your long-term financial goals and make an informed decision about how much you can save for retirement without negatively impacting your current financial well-being.
While a 401k can certainly be an excellent retirement tool, it is essential to be mindful of its limitations and potential drawbacks. By actively managing your investments and making informed decisions, you can safeguard your future and strive for financial security. Remember, knowledge is power, and with the right information and foresight, your 401k can truly work in your favor.
I put 20% for my 401k
I’ve never regretted trying to “max out” my 401(k) each year.
But I also have prioritized non-qualified savings and emergency fund, etc. so that we’re more “balanced” in our different “buckets.”
So the 401k didn't hut you, you hurt yourself.
9 minutes to say "Don't max out your traditional 401(k) unless you already have a fully-funded emergency fund"?
You can pay zero longterm capital gains if you don’t sell too much in a year in a regular brokerage account. The max is 15% for longterm gains, that beats if you took 100k from a 401k. Also no early withdrawal penalty from a brokerage account. The only extra advantage in retirement accounts is they are protected from creditors and lawsuits. I would contribute enough to get the full match in the 401k, fund a Roth IRA if your income is low enough and put any extra in a regular brokerage account. My brokerage accounts is also my savings and emergency fund. I have some really safe floating rate treasury funds to tap first, then other bonds, then precious metals, then dividend stocks before I have to start cashing out growth stocks that may be down when I need the money.
Dustin, I've been following you for a while now. I appreciate you different perspective and it has allowed me to make some wise financial decisions!
Max out Roth 401k, Roth, and HSA. Boom. Problem Solved.
Stop blabbering , Unorganised
With everything happening now I believe 401k is not going to be there I'm going to lose everything! I have already lost 1/3 of 30 years worth of savings and this is after losing in 2008. I belive the market is going to wipe everyone out and soon.
Uh……. Did I miss where he said what you are retiring with?
Clickbait
3 buckets. Pre-tax, tax free, taxable. If your all pre-tax 401k and you are a good saver you will have a tax bomb in retirement
Based on another video from the same creator..it seems he doesn't like the 401k. Why?
There is value in the fact that the 401k money is hard to get or has an extra cost. If you put it elsewhere you are already thinking about using it for things that are not retirement, almost preapproving alternate uses, that can be a dangerous to a retirement plan especially if you are young. I am 48 have been maxing since I turned 30, plan to retire at 58, my only regret thus far is not doing more ROTH sooner
Max all of the tax advantaged accounts plus a taxable brokerage account. Control your expenses. Retire early. Simple.
I think this video is good to prod people to think about how they invest and their personal situation and maybe NOT max out their 401K. However, if someone is maxing out their 401K, I'd assume they are making good money and hopefully they are financially astute. Meaning they have an emergency fund. They have health insurance that has an out of pocket max that won't require them to dip into savings much (or an HSA that will cover it). And they if they have a Roth 401K option, they are doing that instead of traditional. I have maxed out my 401K for over a decade and wish the limits had been more actually. So, everyone's situation is different but making sure your shelter, food, health insurance and other expenses are covered before maxing out your 401K would be a requirement.
Super saver. I max out my R401k and HSA every year, with the majority of my investing dollar going into my taxable account and savings account. I want access to it.
For 2023, I'm considering reducing R401k contribution down to the company match minimum and going full taxable and savings account. I want to retire early and bridge the gap.
Great advice !
Do you really need a Roth anymore? Just checking because of all the brokers accounts like Robinhood or a different one you can put whatever you want in them and it’s your money anytime you would need it.
I’ve always thought of it as a way for them to force the average person to lock up money and provide liquidity to the markets for the big guys
Good tips, put those in my journal!