The 401(K) Trap
The recent recession has taught us a lot about how we want to "invest" for our futures.
Until the eye-opening downturn in 2007 the average American was comfortable investing his/her retirement funds in mutual funds, stocks and risk-based portfolios.
Then 2007 rolled around and we saw thousands of would-be retirees wondering if they would ever retire as their retirement plans were slashed in half.
So what can we learn from this, and maybe the better question, are we actually learning? I think the main lesson to be learned here is the difference between saving and investing.
When we contribute to a 401(k), IRA or Roth IRA we are actually investing our money.
We are putting that money at risk with the hopes that it will grow enough to fund our retirement.
On the other hand there are people who are saving for retirement.
They are putting money in safe, risk free vehicles that guarantee them growth and stability.
These people are saving not investing.
The recession has also forced us to take a harder look at the nuts and bolts of retirement plans.
Hidden fees, illiquidity, little choice - all drawbacks to the traditional 401(k).
On the other hand many enjoy an employer match that is literally free money.
One of the things that attracts people and financial advisors to plans like 401(k)s and IRAs is the tax deferred treatment of the contributions.
However, taking a closer look at our economic and financial situation as a nation will help one understand that deferring or postponing taxes to a later date might not be the best decision at this phase of the game.
With a 14 Trillion Dollar Debt looming over our country it makes sense that in order to pay down that balance taxes will have to go up sometime in the future.
So the question becomes would you rather pay taxes now at the rates you can see or put off paying taxes until a later date at an unknown tax rate? MSN Money recently ran an article in which an advisor was quoted as saying "Don't worry about what happened to your parents' retirement fund.
" How can we not learn valuable lessons from what has happened to our parents' retirement funds? How can we turn a blind eye to the fact that thousands of people saw their 401(k)s, IRAs and Roth IRAs literally cut in half.
It is absolutely necessary that we learn from the past because, as the saying goes, the past is bound to repeat itself.
Until the eye-opening downturn in 2007 the average American was comfortable investing his/her retirement funds in mutual funds, stocks and risk-based portfolios.
Then 2007 rolled around and we saw thousands of would-be retirees wondering if they would ever retire as their retirement plans were slashed in half.
So what can we learn from this, and maybe the better question, are we actually learning? I think the main lesson to be learned here is the difference between saving and investing.
When we contribute to a 401(k), IRA or Roth IRA we are actually investing our money.
We are putting that money at risk with the hopes that it will grow enough to fund our retirement.
On the other hand there are people who are saving for retirement.
They are putting money in safe, risk free vehicles that guarantee them growth and stability.
These people are saving not investing.
The recession has also forced us to take a harder look at the nuts and bolts of retirement plans.
Hidden fees, illiquidity, little choice - all drawbacks to the traditional 401(k).
On the other hand many enjoy an employer match that is literally free money.
One of the things that attracts people and financial advisors to plans like 401(k)s and IRAs is the tax deferred treatment of the contributions.
However, taking a closer look at our economic and financial situation as a nation will help one understand that deferring or postponing taxes to a later date might not be the best decision at this phase of the game.
With a 14 Trillion Dollar Debt looming over our country it makes sense that in order to pay down that balance taxes will have to go up sometime in the future.
So the question becomes would you rather pay taxes now at the rates you can see or put off paying taxes until a later date at an unknown tax rate? MSN Money recently ran an article in which an advisor was quoted as saying "Don't worry about what happened to your parents' retirement fund.
" How can we not learn valuable lessons from what has happened to our parents' retirement funds? How can we turn a blind eye to the fact that thousands of people saw their 401(k)s, IRAs and Roth IRAs literally cut in half.
It is absolutely necessary that we learn from the past because, as the saying goes, the past is bound to repeat itself.
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