It's important to save for retirement rather than rely on Social Security alone to cover your senior living costs. While those benefits might help you pay the bills, they only provide the average recipient today with about $20,000 in annual income. And chances are, that won't be enough money for you to live on.
On the other hand, if you build yourself a solid nest egg, that, combined with the money you receive from Social Security, might make for a very comfortable retirement. But if you're going to save for your senior years, it's important to choose the right retirement plan. Here are a few reasons a 401(k) plan may not fit that bill.
1. You may be charged hefty fees
Your 401(k) may come with costly administrative fees that you can't negotiate -- fees that eat into your returns from year to year. On top of administrative fees, you might face a host of investment fees in your 401(k). This especially holds true if you load up on actively managed mutual funds, which tend to come with hefty expense ratios.
Now the good thing about most 401(k)s is that they do offer some lower-cost investment options. Usually, you'll have at least a few index funds to choose from in your 401(k), and since index funds are passively managed, their expense ratios tend to be much lower. But still, all told, you might spend more on fees in a 401(k) than you would with an IRA, and that could thwart your savings' growth.
2. Your investment choices may be limited
Some 401(k)s only offer a dozen or so funds to choose to put your money in. If those choices don't align with your investing strategy, you might struggle to assemble a portfolio you're happy with. Furthermore, 401(k)s generally do not allow you to buy individual stocks. That could make it difficult to outperform the broad market if that's a goal of yours.
IRAs, on the other hand, do allow you to hand-pick stocks for your retirement. And as such, you might enjoy more robust growth if you house your savings in an IRA.
Remember, too, that with actively managed mutual funds and index funds, you don't get a say in your investments. Granted, you can choose which specific funds to put money into, but you can't dictate how those funds invest. IRAs give you a lot more control, and that's something you may want to have.
3. You may not get a Roth savings option
Though a growing number of 401(k) plans are offering a Roth savings option, not every 401(k) has this feature. And if you're eager to save in a Roth account, then an IRA may be your best bet.
The upside of keeping your money in a Roth account, whether it's an IRA or a 401(k), is that you'll get to enjoy tax-free withdrawals during retirement. That could make your finances much easier to manage as a senior. Plus, if you're convinced that you'll end up in a higher tax bracket in retirement than you're in right now, a Roth account makes a lot of sense.
Should you forgo a 401(k)?
If you have access to a 401(k) plan through your job and your employer offers a generous matching incentive, it pays to contribute enough to that plan to claim your match in full. But beyond that, you might consider funding an IRA. Doing so could help you save on fees, have more control over your investments, and enjoy the tax benefits that are most important to you.