You’re regularly contributing to your 401(k), and building up a nice nest egg. You’re on a straight shot to retirement, right? Is your 401(k) enough for retirement?

Setting money aside in a 401(k) is a great step toward a secure retirement, but when you’re planning for retirement, a 401(k) may not be enough. That’s because when you’re in retirement having all your savings in one vehicle — a 401(k) — can put you at a disadvantage when it comes to efficiently generating income from your savings. Here’s why it’s important to look at retirement savings beyond a 401(k) for a financially secure retirement.


The beauty of a 401(k) is the tax advantage it offers you — that is, while you’re saving for retirement. With a 401(k), your contributions aren’t taxed, and you won’t owe taxes on investment growth like you might with a traditional investment account. This allows you to save more today, reduces your taxable income during your working years (when your income is likely highest) and allows for efficient growth.

However, when you reach retirement, you’ll owe taxes on your withdrawals (technically known as distributions) from your 401(k). In fact, once you turn 72, the government requires you to take yearly distributions (and pay tax on them) whether you want to or not. That means every dollar you take out of your 401(k) is now taxable income. Your withdrawals will impact the tax bracket you’ll fall into each year. In addition to paying a larger percentage of your savings to taxes as you withdraw more, your taxable income each year in retirement can affect things like Medicare costs or even how your investments are taxed.


Stock market declines are a part of investing. When you’re young and don’t need your money that’s perfectly fine. Take the stock market’s ride in 2020. If you left your money invested because you won’t need it for a decade or more, you’ve likely already regained the value lost during the year. That long-term mindset is key to growing your wealth via investments.

But the story changes when you’re in (or nearing) retirement and those investments are now your source of income. At this point in life, stock market declines and volatility can become a worrying problem. If you need to sell investments during a downturn to generate income, you’ll have to sell more shares to get the same amount of money. That leaves fewer shares to regain value when the market recovers, leaving you with less savings over time. Even bonds, considered relatively safe investments, aren’t immune from market volatility and risk.


Because a 401(k) has tax advantages, contributions are limited. In 2020, you can only contribute up to $19,500 — your company match doesn’t count toward this. And if you’re 50 or older, you can contribute an extra $6,500 per year.

If you’re young and thinking that you’ll never save that much anyway, a good strategy is to make sure you’re contributing enough to get your full employer match. Then, increase your contributions slowly (maybe by 1 percent each year). As you increase your savings and as your earnings increase over the span of your career, there’s a decent chance you’ll eventually get to the max.


Given the limits on a traditional 401(k), what are some options that can help generate reliable, tax-efficient income in retirement?

A Roth: A Roth account is a version of a 401(k) that many companies offer. You can also open a Roth IRA on your own (although there are income limits that may prevent you from contributing). A Roth account is the opposite of a traditional 401(k) or IRA from a tax perspective. With a Roth, your contributions have already been taxed, so you typically won’t owe any income taxes in retirement on your distributions. And, just like a traditional account, your savings grow tax free.

The utility of a Roth really shines when you get to retirement, because it gives you a little more flexibility with your taxable income. That’s because you can mix and match taxable and tax-free distributions from your traditional 401(k) and Roth, respectively, to reach your income goals but also land in a desired tax bracket each year.

A Traditional IRA: A traditional IRA is very similar to a traditional 401(k). If you don’t have a 401(k) or you have maxed out your 401(k), you could contribute to a traditional IRA. IRA contributions are also capped yearly ($6,000 in 2020 — and an additional $1,000 if you’re 50 or older). Just remember that the contribution limits are a total for Roth and traditional. That means you could contribute $3,000 to a Roth IRA and $3,000 to a traditional IRA in a year, but not $6,000 to both.

Whole life insurance: Whole life insurance is a great financial utility player. In addition to its death benefit that protects your family during your working years, whole life insurance accumulates cash value that grows in a tax-advantaged way over time and isn’t correlated to the market. This makes the cash value of a whole life insurance policy a great place to keep cash reserves that you will need to help weather volatility in retirement. If the market drops, you can access the cash value to meet your needs. Then, when the market bounces back, you can switch back to living off your investments. This helps you avoid selling at market lows, which can erode the value of your portfolio.

An Annuity: In retirement, it’s a good idea to cover your essential expenses (food, utilities, taxes, etc.) with guaranteed income that you can’t outlive. Social Security is one source of guaranteed income. Pensions are another. But they’re about as common as phone booths these days. Annuities are a third type of guaranteed income that you can use to cover essential expenses.

Non-Qualified Investments: These are just traditional investments. They don’t qualify for any special tax treatment (hence: non-qualified). If you’re looking to diversify and give yourself some flexibility to access your money prior to retirement, or if you’re maxed out on your qualified contributions, non-qualified investments can help you grow money over time for any goal, including retirement.

If you’re feeling a little overwhelmed by all the options and how everything works together, that’s okay. A financial advisor can help you better understand what’s best for your situation and he or she and help you build a plan to get you to retirement and through it.

This publication is not intended as legal or tax advice. Consult with a tax professional for tax advice. The primary purpose of life insurance is the death benefit. Utilizing the accumulated value through policy loans, surrenders, or cash withdrawals will reduce the death benefit; and may necessitate greater outlay than anticipated and/or result in an unexpected taxable event. Assumes a non-Modified Endowment Contract (MEC).

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