Do retirement plans work for the American investor? One of the nation’s largest investment firms, Vanguard, analyzed data from 4.7 million of their defined contribution plans and found through their “How America Saves 2021” report that the average 401(k) balance reached $129,157. And as more individuals gain access to retirement plans, we will hopefully see that number rise. With that said, the health of your 401(k) is not limited to value alone; asking critical questions and understanding tax diversification also need consideration.
We find that too often investors direct their full, uninterrupted attention to their 401(k) account balance. Focusing on that metric alone can mislead the individual to make poor tax and investment actions. Accumulated savings is only one measuring stick for success. Consider a few other vital elements by asking the following questions. Are you saving enough? Are your investments matching your long-term risk tolerance, or are you letting emotions guide your decisions? What will be the tax implications down the road when I begin taking distributions for income?
When considering more than a single factor, let’s use health and weight to hammer the point home. People often focus on reading the number on the scale without considering other vital metrics such as waistline measurement and blood pressure. Yet all of these components affect overall health.
When contributing to our 401(k) plans, we can easily see the amount of savings we have accumulated and the projected income upon retirement via our 401(k) plan’s website. That sounds like a handy feature; however, that system doesn’t articulate how income is produced, nor does it reflect taxation on those assets in the future. For example, under the current tax code, many individuals use the Roth option in their 401(k) plan. That means their contributions are invested into a bucket that will grow tax-free and be distributed tax-free. So, although the tools are nice to look at, they aren’t giving us complete data, which is the equivalent of using the weight on a scale as your only guide to health. We can all agree that is a bad idea, and not having an annual check-up or professional medical advice could lead to disaster later.
Lawmakers created the 401(k) to give individuals the opportunity and responsibility to save for their future. And while some may have lower balances because of different spending habits, those of us who have disciplined approaches and focus have healthy 401(k) plans that are successful.
If you are reading this article, you are not average! You are unique and have individual goals and a vision for retirement. Academics dwell on average life spans, average income, average returns, etc. Averages are valuable for national studies, but they don’t represent the lives of many people who are reading this column. Focus on your dreams, situation, and needs, and never forget to ask the questions we laid out earlier. If you need a team to help evaluate where you are or a guide to help point you where to go next, please give Financial Enhancement Group a call.