If your job gives you access to a 401(k) plan, you may be inclined to sign up right away -- especially if there are employer matching dollars to be had.
Investing in a 401(k) has its benefits. In addition to the potential for free money, these accounts are funded seamlessly through payroll deductions, making it easy for some savers to stay on track with their contributions.
But while it could pay to take advantage of your employer's 401(k) plan, you may want to think about saving outside of that account as well. In fact, spreading your money around could give the best of all worlds.
Image source: Getty Images.
The problem with only saving in a 401(k)
While 401(k)s often offer the benefit of employer matching dollars, you're not guaranteed to get your hands on that money if your company imposes a strict vesting schedule. And even if you're able to snag your match with ease, one big problem with 401(k)s is that they generally don't allow you to invest your money in individual stocks.
Rather, with a 401(k), you're usually limited to a bunch of different funds. Now if you're a hands-off sort of investor who doesn't tend to do a lot of research into stocks, then you may have no problem putting your 401(k) into a broad market index fund and calling it a day. But if you're someone who likes full control over your investments, a 401(k) plan may not give that to you.
Also, because 401(k)s tend to limit your investment options, you could end up facing high fees. This especially holds true if you opt to favor mutual funds in your account, which commonly have much higher expense ratios than index funds. And the more fees you pay, the less money you end up with.
Make a 401(k) part of your retirement savings strategy
It absolutely pays to fund your 401(k) to the point where you've claimed every matching dollar your employer is offering up. But beyond that, you may want to think about branching out into an IRA.
The nice thing about IRAs is getting to invest your savings in individual stocks. And a combination of broad market index funds in your 401(k) and hand-picked investments in your IRA could set you up for strong returns, all the while helping you minimize your fees.
Another option to consider is putting some of your retirement savings into a regular brokerage account. While you'll lose the tax breaks associated with IRAs and 401(k)s, your money will be unrestricted, so you can take withdrawals at any age. If you're hoping to achieve an early retirement, then it's important to set yourself up with access to some unrestricted cash, since you'll be penalized for tapping an IRA or 401(k) prior to age 59 1/2.
It's easy enough to sign up for a 401(k) when you have one available and arrange for those automatic contributions. And for some people, saving for retirement solely in a 401(k) could make sense. But you may want to consider the benefits of branching out into different accounts on top of your 401(k).
