Should You Abandon Your 401(k)?

Why we shouldn't always accept conventional wisdom.

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A couple of days ago, The Daily published the following episode: “Was the 401(k) a Mistake?” It’s 30 minutes long and well worth a listen. The episode examines precisely what the title suggests. Listening to it compelled me to reflect not just on 401(k)s but also the financial advice many of us accept as gospel. What if it isn’t?

Why people don’t stick to 401(k)

I knew very little about 401(k)s by the time I contributed to one. I was working at my first PR job in Manhattan. I only knew two things: it was a retirement fund, and my company would match my contribution. I contributed the bare minimum. Why? Because I was 25 years old, and at the time, retirement was an urban legend.

Therein lies one issue with 401(k)s: the onus placed on the individual (as opposed to pensions) leaves retirement susceptible to inconsistent adherence and, more importantly, the vicissitudes of life.

Here’s the TL;DR takeaway of the episode in the form of a question:

Is retirement a right or a privilege?

Half of Americans have nothing saved

A startling statistic from the podcast:

49% of people in the 55-65 age range have put nothing aside for retirement.

You can draw one of two conclusions from this eye-opening stat:

1) Half of U.S. citizens are wildly irresponsible.

2) The system failed them.

With regard to conclusion number two, I don’t just mean 401(k)s. I mean the entire economic ecosystem. Many middle- and low-income citizens don’t have access to 401(k)s. Even many of those who do have one don’t have the luxury of contributing the maximum. They’re performing a financial balancing act that can be thrown way off course by an unexpected event, like an accident or an illness. When health insurance fails, the 401(k) becomes the emergency fund.

Is the 401(k) a scam?

Does that mean the 401(k) is bunk? No, of course not. If you have access to a 401(k) program, contribute to it. If your company matches your contribution and you have the financial latitude, contribute the maximum. Still, there are two chief factors to consider:

1. There is something amiss when nearly half of people approaching or at retirement don’t have anything saved. Does that mean the 401(k) is the sole culprit? No, but as the leading retirement vehicle in the country, the 401(k) must be reevaluated.

2. The 401(k) can be a powerful financial tool, especially if you contribute early and consistently (the benefits of compounding interest are widely publicized for a reason), but everyone should consider their particular economic situation in order to set financial priorities. For example, if you have crippling credit card debt, you must prioritize that over contributing to your 401(k), as the damage that debt can do outweighs the benefit of short-term contributions.

Renting vs. buying

The crux of what I’m trying to say is that conventional wisdom vis-a-vis financial advice is not one-size-fits-all. For example, conventional wisdom dictates that owning property is better than renting. Often, it is, but again, context matters.

There are a lot of questions to ask when buying property:

• What interest rate can you secure for the mortgage?

• How much of a down payment can you afford?

• Can you buy it outright?

• What is the condition of the property? Will it need short-term updates, like a new roof or boiler?

• What are maintenance costs likely to be?

• How high are property taxes? Related, do you have children?

Failing to answer these questions in depth can lead to a risky mortgage and a burdensome property. Building equity is great, but not at all costs. If you’re overextending yourself and compromising your financial security, you should reconsider.

In some cases, renting is the more sensible option. It gives you more flexibility. You can build up a financial cushion until you’re in a position to secure a more favorable mortgage.

It’s not about whether a 401(k) is good or bad, or whether buying a property is good or bad. It’s about assessing your particular situation and finding the right options to match it.

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