Your financial goals and objectives have likely changed dramatically since you started a retirement account like a 401(k) or IRA. Now is a good time to put your retirement plan through a 3-point checkup to see if it still makes sense:
The predictability of the growth in your plan, how important is it to you to know the minimum value of your plan and how much income it can provide you when you want to tap into it?
If the market tanks by 50% or more (as it has twice since the year 2000) just before or after you retire, will it significantly affect your retirement lifestyle?
401(k)s and IRAs have many restrictions on how and when you can access your savings. You’ll have to pay taxes plus a 10% penalty if you withdraw money before age 59½. And you’ll have to sell investments that you counted on for growth. If it’s a bad time to sell, you’re out of luck. If your 401(k) plan permits borrowing (IRAs do not), there are strict limits on how much you can borrow, how long you can borrow it for and how you must pay it back. Because of this, you really have to consider the money in your retirement account as a non-liquid asset you won’t touch until age 59½.
“People like the idea that they can contribute to a 401(k) or IRA with before-tax dollars. Over the years, they tend to forget they have only deferred their tax liability and are sitting on a tax time bomb, as they discover the IRS is taking 25% to 50% of the value of their retirement savings. It’s a little-known fact that, if tax rates are the same, it doesn’t make any difference if you pay your taxes before you put money aside, or when you take withdrawals.
Pamela Yellen is founder of Bank On Yourself, a financial investigator, and the author of two New York Times best-selling books, including her latest, “The Bank On Yourself Revolution: Fire Your Banker, Bypass Wall Street, and Take Control of Your Own Financial Future.”