Is 401k Participation Enough?

• Financial Independence (Retirement)
• When Should Retirement Planning Begin?
• Is 401k Participation Enough?
• What about Social Security?

Probably not. However, it is a good start towards financial independence. As well, the company match represents a risk-free return on investment, so it should be captured as early in your employment as possible, thereby making it a priority in your financial plan.

There are a number of reasons that the 401(k) may not be sufficient for retirement security. (It is certainly not enough for financial independence.) First, all cash flows pulled from conventional pre-tax 401(k) plans are recognized as income, subject to ordinary income taxation. Marginal tax rates change over time. Hence, the amount of cash available from a 401(k) plan for retirement spending is uncertain.

A good retirement strategy will include both taxable and tax-exempt accounts, and, perhaps, hybrid structures like annuities, which include a mix of pre-tax and after-tax cash flows when distributed. In addition, recall that Medicare premiums are dictated by income (technically, Modified Adjustable Gross Income, a/k/a MAGI). A retirement strategy that includes taxable and tax-exempt accounts allows for better withdrawal strategies that may result in lower Medicare charges, for example.