Why a 401(k) and high-yield savings account may not be enough
Managing Director, Head of Wealth Management Banking
- Not everyone has access to contributing to a 401(k), but if you do, maxing out your 401(k) is an important step toward a successful retirement. However, it may not always be enough.
- Other strategies, including individual retirement accounts (IRAs) – such as a Roth or traditional IRA – as well as annuities and investment accounts can help you continue to save with different tax advantages.
- A high-yield savings account (HYSA) is a good place to store cash for emergency and short-term needs but lacks the tax perks that come with dedicated retirement accounts.
401(k)s and HYSAs
Many Americans saving for retirement have a 401(k) plan through their employer, and they may receive matching contributions up to a certain amount. Currently, most Americans are allowed to contribute up to $24,500 per year to their 401(k), not including employer matches., Those 50 or older are allowed to make catch-up contributions totaling an additional $8,000 per year and potentially even higher.,
401(k)s are a potentially powerful retirement savings tool that typically allow for pre-tax and/or post-tax contributions that benefit from tax-deferred growth, if any. Withdrawals are generally taxed as ordinary income, which can also be beneficial, as many Americans will drop to a lower tax bracket in retirement.
Some households that max out 401(k) contributions will turn to HYSAs, which typically earn higher interest rates than normal savings accounts, even though those rates fluctuate in accordance with market interest rates. However, many financial advisors do not recommend HYSAs as viable retirement savings vehicles, due in part to the fact that interest earned on cash held in HYSAs has not always kept pace with inflation over time. Instead, they will typically advise consumers to view HYSAs as a parking spot for emergency funds and cash for short-term needs.
Fortunately, for Americans who do consistently reach 401(k) contribution limits and still wish to save more or don't have access to an employee-sponsored retirement plan, there are other options to help maximize retirement savings.
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How much is enough for retirement?
Before you determine which retirement savings strategies may be best for you, it’s wise to determine how much money you will need in your golden years. To do so, first consider your needs, goals and lifestyle expectations. Other key considerations include when you would like to retire and what your Social Security income will look like.
Once you’ve identified those benchmarks, a rough idea of how much income you’ll require to meet your needs will start to take shape. Then compare that figure to the savings capacity of your current retirement account to determine whether or not you need additional savings vehicles. For example, depending on when you started contributing to your plan, how much you’ve contributed in years past and how soon you plan to retire, you may not be able to reach your goals with a 401(k) alone, even if you max out contributions from now until then.
On top of this, the cost of living typically rises over time, so the funds needed in the first five years of retirement are unlikely to match what you need in the last five. That’s one more reason why it may be worth investing in other types of accounts and assets to prepare for retirement.
Retirement planning beyond 401(k)s
Maxing out your 401(k) contributions is a crucial step toward meeting your retirement goals, but it may not always be sufficient to meet your long-term financial needs. Fortunately, there are several other investment options and retirement strategies to consider that can complement your 401(k) and help you build a more robust retirement portfolio.
IRAs
- Traditional IRA: Offers tax-deferred growth, with contributions potentially being tax-deductible. Withdrawals are typically taxed as ordinary income.
- Roth IRA: Contributions are made with after-tax dollars, allowing for tax-free withdrawals in retirement if certain conditions are met. This can provide tax diversification and flexibility in managing your retirement income but is subject to eligibility requirements.
Annuities
- Annuities can provide a guaranteed income stream in retirement. Options include fixed, variable and indexed annuities, each offering different features. Many annuities come with a "living benefit rider," ensuring a specific annual income for life, regardless of the account's value, but this may cost more.
Investment accounts
- General investment accounts allow for investment in a wide range of assets, including stocks, bonds, mutual funds and ETFs. These can offer taxable or tax-efficient options and provide an abundance of products to help meet your near-, middle- and long-term goals. While they don't offer the same tax benefits as retirement accounts, they provide flexibility and diversification opportunities.
The bottom line
By exploring these diverse investment options and retirement strategies, you can create a comprehensive retirement plan that addresses your unique financial needs and goals. It's important to regularly review and adjust your strategy to ensure it remains aligned with your evolving circumstances and market conditions. You should consider speaking to a tax professional to help you understand the tax impact on these various choices as they relate to your retirement plan.
Need help figuring out where to start? Speak with a J.P. Morgan advisor who can assist you with your retirement goals and planning.
For important disclosures, please refer to the disclosures section for detailed information.
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Managing Director, Head of Wealth Management Banking
