Money Rehab with Nicole Lapin - Is a 401(k) the Key to a Comfortable Retirement?

Episode Date: September 9, 2022

In honor of 401(k) Day, Nicole wants you to give yourself the gift of financial freedom in retirement. Today, she helps you figure out if a 401(k) is the right move to put you on that road to financial freedom.

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money is working as hard as you do. So why overcomplicate your money? Keep it simple with Bank of America, your one-stop shop for everything you need today and the goals you're working toward tomorrow. To get started, visit bofa.com slash newprosmedia. That's b-o-f-a dot com slash n-e-w pros p-r-o-s media. bfa.com slash newprosmedia. Hey guys, are you ready for some money rehab? Wall Street has been completely upended by an unlikely player, GameStop. And should I have a 401k? You don't do it? No, I never do it. No.

You think the whole world revolves around you and your money. Well, it doesn't. Charge for wasting our time. I will take a check. Like an old school check. You recognize her from anchoring on CNN, CNBC, and Bloomberg. The only financial expert you don't need a dictionary to understand. Nicole Lappin.

Happy, happy frickin' 401k day. As a financial expert, these are the holidays I nerd out about. Yeah, Halloween is cool. But what about celebrating your future self's financial independence? That's all treats and no tricks. To celebrate this day, we're going to talk about 401ks and whether it's the right retirement choice for you. First things first, WTF is a 401k. A 401k is a retirement account established by employers for employees that's tied to the stock market. If you're at a company that offers a 401k, you can make contributions before the money hits your

paycheck. In other words, it's pre-tax and your contribution is invested in an account with your name on it. People get very excited by a 401k because sometimes an employer can make a matching contribution to your account, which is like getting free money. We love free money. However, don't think of this money as tax-free because you do pay tax when you take the money out. If you take it out before you're 59 and a half, yes, that's the real number that the IRS came up with, you have to pay penalty fees. 401ks do tend to be the most popular retirement plan, but that doesn't necessarily mean it's the one that's best for you, especially if there's no match. Remember, trusting your employer with your money is trusting your employer with your money. Why not trust yourself instead?

Most folks don't realize that 401ks aren't actually meant to be retirement accounts. They are technically profit-sharing accounts because they allow you to have 100% of your money in the company's stock, which you should never do, by the way. Hello, WorldCom, Tycho, and Ron. Maybe it's just me, but the basic idea of having your retirement and your job being so closely linked seems less than ideal. After all, familiarity might breed contempt in family, but it breeds blindness in business. If you put all of your money into your company's stock and the company goes out of business, your livelihood is doubly screwed. Now with losing your job and later with losing your retirement savings. Now, I don't want to slam 401ks on their own

holiday. 401ks can be amazing, but no financial vehicle is one size fits all, and I want to help you figure out if a 401k fits you just right. So let's cut to the chase. A 401k is right for you if, one, your employer matches your contributions. Two, you need something easy or you just won't save it all. No shame if that's you. Three, you want to go crazy with your contributions and open all sorts of different accounts. By the way, you don't have to be exclusive here. The more the merrier. The limit for 401ks in 2022 is $20,500 for your personal contributions. Number four, you might need to borrow from yourself. Typically, if you have to

borrow from your 401k, penalties and taxes are involved. However, there are a few exceptions for qualifying situations. Before making any early withdrawal, though, you should talk to your HR department to fully understand the rules. So that's that. Let's look at the other side of the coin. A 401k is not necessarily right for you if you, one, don't have six to nine months of emergency reserves in the bank, yes, you need to save for retirement, but you need liquidity first. You can't pay for stuff with a 401k. Number two, your employer doesn't match your contributions. Many do, but not all do. So check. Many companies have suspended 401k matching as a cost-saving measure during the pandemic. Number three.

You have a significant amount of credit card debt. Paying down debt is a form of long-term savings because if you don't pay it down now, you'll pay more and save less later. Avoid the potential avalanche of debt and tackle the mountain of interest accumulating bills first. Number four, you want freedom of choice on fees and investment options. Since this is your employer's show, basically they pick the plan and the fees. You get a few options for sure, but that's it. Even if the fees seem low at the time, they do add up and you may be able to do better if you feel adventurous and studious enough to tackle it on your own. So how'd you do? Regardless of your answer, I can't end this

episode without a big plea. And I need you to really listen to this one closely for me. If you decided a 401k is not right for you, you need to decide what other retirement vehicle will take its place. Likely, even if you're going to sign up for a 401k, you'll need to use other retirement vehicles to ensure that you'll get the life you want in retirement. One of the biggest financial issues that bite people in the butt is not saving enough for retirement. So take 401k day to set yourself up for financial success in retirement. Your future self will thank you. For today's tip, you can take straight to the bank. A 401k can be good. It can be great, but it all depends on you,

your debt situation, your goals, and your company's plan. If your employer doesn't match contributions, or if there are high fees involved, or if the plan doesn't come with the right investment choices for you, you might want to rethink it. If you're eligible for a Roth IRA, start one today. The best time to do this is when you're in a lower tax bracket because you'll pay less now and still not a later. Money Rehab is a production of iHeartRadio. I'm your host, Nicole Lappin. Our producers are Morgan Lavoie and Mike Coscarelli.

Executive producers are Nikki Etor and Will Pearson. Our mascots are Penny and Mimsy. Huge thanks to OG Money Rehab team Michelle Lanz for her development work, Catherine Law for her production and writing magic, and Brandon Dickert for his editing, engineering, and sound design. And as always, thanks to you for finally investing in yourself so that you can get it together and get it all.