What If You – Won’t – Have a Fat 401(k)?

February 5, 2014

401(k)In the financial world it’s generally assumed that you – and just about everyone else – will have a fat 401(k) plan by the time you retire. That plan will be the bedrock of your entire retirement strategy. But let’s play devil’s advocate here for a minute: What if you won’t have a fat 401(k) plan?

It’s actually more than a remote possibility. In fact, according to statistics the average American probably won’t have anywhere near enough in their 401(k) plans to be able to retire completely.

What are some reasons that might interfere with having a fat 401(k) plan by the time you’re ready to retire?

  • A poor 401(k) plan – let’s face it, not all 401(k) plans are good.
  • A career crisis, career change or prolonged job loss.
  • Being forced to make early withdrawals to deal with a more immediate crisis.
  • Less than expected investment returns (often due to having a poor plan).
  • A stock market crash or prolonged bear market, especially in the years just before retirement.

It’s not pleasant to contemplate these possibilities, but all of them are more than remotely conceivable, which is why we should have a plan.

Invest Outside Your Retirement Plan

A poor 401(k) plan is the first reason listed above for not having a fat 401(k) plan. One of the factors that will make a plan poor is a very low contribution rate. Though the IRS will allow you to contribute up to $17,500 ($23,500 if you are 50 or older) into your 401(k) plan at 100% of your earnings, most employers limit your contributions substantially.

For example, your employer might cap your plan contributions at 10% of your income. If you make $40,000 per year, this will limit your contributions to just $4,000 per year. Even if you are in your 20s, this won’t get you a fat 401(k) plan by the time you’re ready to retire.

For this reason, you should invest outside of your retirement plan. Any investment assets that you have can provide income in your retirement years, and they don’t have to be specifically included in a formal retirement plan.

Lower Your Cost of Living

One of the very best ways to deal with lower than expected retirement assets is to have a plan to cut your living expenses. There are various ways you can do this:

  • Plan to downsize your living arrangement.
  • Relocate to where life is less expensive.
  • Develop inexpensive (or free) hobbies and pastimes.
  • Keep a close lid on lifestyle inflation.
  • Become a bargain hunter – there’s almost always a less expensive way to do or buy just about anything.

Don’t make the mistake of assuming that you can make these changes just before retirement. Many of them are lifestyle choices, and the earlier that you adopt them, the easier it will be to incorporate them into your life.

There’s one other benefit to developing these practices now . . . . The less money you need to live on, the more you will have to save and invest for your retirement years. Consider the potential for that between now and retirement.

Get Out of Debt

Perhaps a single best way to lower your cost of living is to get out of debt. By eliminating car loans, credit cards, installment loans, and other debts, it’s possible to lower your living expenses by more than $1,000 per month. Do you think that will have an impact on your retirement planning?

And just as is the case with lowering your living expenses in general, the sooner you adopt this strategy the better off you will be by the time retirement rolls around. The money that you are not paying into debt between now and retirement could be invested so that you will have even more money available when you retire.

Plan a Post-Retirement Career to Supplement Your Income

Taking retirement no later than age 65 is just about the minimum goal most people have. The problem is that life doesn’t always cooperate with our plans. That means we have to have a certain amount of flexibility built in to whatever plans we have, including long-term goals like retirement.

There are a lot of variables when it comes to retirement planning, especially if it is many years into the future. None of us have any idea how the stock market will perform between now and then, to say nothing of inflation. There are also concerns about the stability of Social Security. The point is, we all need to have a backup plan.

One of the best backup plans when it comes retirement is a post-retirement career. You may need to cover any shortfalls in retirement income with some form of earned income, even if it’s only on a part-time basis.

And once again, a post-retirement career is probably not something you want to put off until the last minute. It may take you several years to develop the perfect post-retirement career, not the least of which because you will want to make certain that it’s something you actually like to do, and can do on no more than a part-time basis.

No matter how optimistic you may be about your retirement, it‘s always best to be prepared for contingencies. The time to do that is before problems happen. You’ve got plenty of time to develop those plans now, which is the best reason why you should.

Do you ever worry that your 401(k) plan won’t be quite what you hope it will be the time you retire? Leave a comment!


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Kevin Mercadante is professional personal finance blogger, and the owner of his own personal finance blog, OutOfYourRut.com. He has backgrounds in both accounting and the mortgage industry. He lives in Atlanta with his wife and two teenage kids and can be followed on Twitter at @OutOfYourRut.

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