Originally published in the News Star and the Shreveport Times on Sunday, January 8, 2017.
Q: I’ve been at my new job for enough time that I can now participate in my company’s 401K plan. I’ve heard mixed messages about these things. But if I don’t do a 401K plan, what else is there to prepare for retirement on day?
A: When you decide to build a new house, what’s the first thing you should do – go hammer shopping?
A 401K plan is a tool. Like most things in life, you need to make sure you understand what the capacities and limitations of the tool are. And many people, even you, may find the 401K to be a useful tool.
My youngest son is in his fourth year of a five year architecture degree program. He’s had the building bug his whole life. He used to collect scrap wood and nails, find a hammer and just start wailing away at it.
“Whatcha building buddy?” I’d ask.
“I dunno! I’ll let you know when I’m finished!” he would smile at me, content with his whacking.
Those days are behind him now. He still enjoys building things, but most of his time is spent on designing them. What I know about architecture would fit into a very small toolbox, but before the design even begins, an architect asks a lot of questions about the purpose of the structure being built and the desires of its owners.
First comes the design phase – the plan.
Next comes the skill phase, in which the plan is implemented. Allow me to oversimplify by identifying this as the stage in which you employ the right craftsmen to build the plan.
Only then comes the tool phase, in which the craftsman, guided by the plan, selects the tools and materials necessary to build the structure called for in the plan.
The same is true with your retirement efforts.
First, there’s a design phase, in which you design a plan for building your “retirement house.”
Second, there’s a skill phase. Here you must first decide whether this is a do-it-yourself project or whether you’ll find and hire qualified and trusted “craftsmen” (aka, financial professionals) to help you build the retirement house you’ve designed.
Phases one and two may be accomplished by the same person. In other words, the same financial professional may both help you design and implement your plan.
But be very, very careful here. It’s all too easy for a financial professional to give the design phase the short shrift so he can get to the building phase (where he makes his money). Be sure and ask direct questions before you decide on whom to hire.
Once you’ve got a design and you’ve settled on the appropriate, trusted advisor(s), then you can select what tools to use.
401Ks can be useful tools, but they’ve got limitations. They work pretty well to help you accumulate assets to deploy for your retirement. But once you begin approaching retirement, their weaknesses begin to show up. Fund selections can be too limited for someone nearing retirement, and distribution options (taking money out during retirement) can also be limited.
The main thing to keep in mind is that a 401K plan is not a retirement plan – it is a retirement tool to be used judiciously as called for in the retirement plan you (and your advisor) design – first.
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