Retirement plan decisions made easy
Lesson 9: Your 401k, Your Other Assets, and Your Life
I’ve hammered away in this book about the importance of saving through your 401k plan, and especially about contributing at least the maximum amount that your employer will match. However, you will likely still need other assets to retire comfortably, especially if you’re like most people and didn’t really begin saving until later in life.
Any savings that you manage to put away helps your retirement, whether it is inside your 401k or not. Clearly, a five percent savings rate over a lifetime makes retirement much easier than no savings whatsoever. And for a typical person, a ten percent savings rate instead of five would remove any need at all to cut back during retirement. But notice something else. A higher savings rate forces you to live on a little less while you are working. This makes the transition into retirement easier because you have already learned to live on less spending by eating at home more often, taking less expensive vacations, or driving your car another year or two before buying a new one.
Drill Down: Savings Helps Your Retirement
Unfortunately, a ten percent savings rate is not an automatic ticket to financial security. Your results depend on when you start saving, how you invest your assets, and how the financial markets behave, but you won’t be too far off if you save ten percent of your income and invest it along the suggestions in Chapter 3 or Chapter 4. Two issues are important with regards to other investment assets: the order in which you fill your various investment buckets and what you put into each bucket. The buckets could include your 401k and possibly an IRA, a brokerage or direct mutual fund account, and maybe a college savings account. Generally speaking, fill up the 401k first, and then after you’ve maxed out your IRA, open a taxable account at a full service brokerage firm (example: Merrill Lynch), a discount brokerage firm (example: Charles Schwab) or a mutual fund company (example: Vanguard).
Drill Down: How to Invest Other Assets
Invest the money in your 401k, IRA, and a taxable account according to the asset allocation I recommend in Chapters 3 and 4. But the key point to remember is that the allocation percentages should apply to your assets as a whole. It does not have to apply to every particular account. In a taxable account, interest and dividends are taxed every year, but capital gains are not taxed until you sell the asset. The assets in a 401k (or IRA) are not taxed at all until you withdraw the money, and then it’s all taxed at regular income tax rates. This means that you’ll want to hold stocks in your taxable account and bonds in your 401k. (If you own any REITs, they should be lumped with bonds and placed into your 401k.)These are the basics of what you need to make your financial future secure. I’ve tried to give you the knowledge you’ll need to use your money effectively to pursue and attain all your hopes and dreams.
You are not logged in. Log in or create an account.
Click here to sign up for our monthly newsletter delivered via email.
Lesson 1: What the Heck is a 401k, and What’s So Great About It?
Lesson 2: Contributions to Your 401k
Lesson 3: Investments “Cook Book” Approach
Lesson 4: Investments: How Investments Work
Lesson 5: Loans and Hardship Withdrawals from Your 401k
» Lesson 9: Your 401k, Your Other Assets, and Your Life
The 401k ebook is available in text, audio, and video formats. The current selected format is text. You may also switch to the audio or video formats by clicking on the icons at the top of this page.