If you don't make an effort to save for retirement, you may be forced to live on Social Security alone. And that could lead to a pretty cash-strapped retirement for you.
A much better bet is to fund a retirement plan throughout your working years. And if your employer offers a 401(k), you may be inclined to sign up -- especially if that plan comes with a generous match.
Now it's always a good idea to snag your 401(k) match in full. After all, that's free money for your retirement.
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But while it's one thing to put some of your retirement savings into a 401(k) plan, it's another thing to put your entire nest egg into one of these accounts. Here are three pitfalls you might encounter if you only save for retirement in a 401(k).
1. Limited investment choices
When you invest for retirement in an IRA, you generally get the option to build a portfolio that consists of individual stocks. With a 401(k), your investment choices are usually far more limited. You're typically looking at a mix of different funds to choose from, and you can't buy stocks on an individual basis.
If you're someone who's good at picking stocks, you may want to consider opening an IRA on top of a 401(k) for retirement savings purposes. That could help you build a portfolio that's more conducive to meeting your goals.
2. High fees
Because 401(k) plans tend to limit your investment choices, you may end up having to put your money into funds that come with costly fees, known as expense ratios. On top of that, there can be administrative fees associated with your 401(k) that are passed on to you.
With an IRA, your fees might be lower. And the less money you're losing to fees, the more you stand to retire with.
3. Early withdrawal penalties
Some people end up plugging away at their careers well into their 60s or even beyond. But maybe you have high hopes for an early retirement. If so, keeping all of your money in a 401(k) plan could be a big mistake.
With a 401(k), you're generally looking at a 10% early withdrawal penalty for removing funds prior to age 59 1/2. Now there can be an exception to this rule if you separate from the employer sponsoring your 401(k) in the calendar year in which you turn 55 (or later). In that case, you may be able to get your money penalty-free starting at age 55.
But if you know that early retirement is on your radar, then you may want to put some of your savings into a taxable brokerage account. That way, you'll have unrestricted access to your money when you want or need it.
There's nothing wrong with using a 401(k) to save for retirement. But you may want to think twice about putting all of your long-term savings into a 401(k). Branching out into an IRA and a taxable brokerage account could help you limit your fees, open the door to more investment choices, and ensure that you have access to your money at all times.
