Broker Check

It Pays to Look at the Complete 401 (k) Picture

Written by Angela Vahue - Published in the Rochester Business Journal - March 2021 Issue

Many Americans have struggled financially due to their "over reliance" on their 401(k) strategy. Following guidance to always "max out" their 401(k) contributions ... they may have placed all their eggs in that basket while often ignoring other important financial issues. Many build their personal retirement solution around 401(k) plans. And for good reason. There are multiple benefits to 401(k) ownership ... which make them a powerful way to save. Systematic. Tax deferral. Potential company match. Long term growth potential. Millions have tied their entire financial future to their 401(k) as a means of someday achieving financial independence. Let us consider looking at your 401(k) options with a "wide angle lens."

Worry in the proper order

Retirement strategies, like all other wealth building endeavors,  should  strive to fully protect against what may happen today before deciding how to prepare for the future. If a single unexpected life event could create obstacles for your future, it may deserve priority attention. Therefore, before embarking on preparing for the rest of your life, make sure your todays are covered. Have your financial professional perform a thorough review of your  protection portfolio to make sure you have protected yourself against death, disability, lawsuit, a medical emergency, mother nature or any other event that could disrupt your cash flow (or income). A sound retirement strategy must be designed to work in all scenarios. If your protection is lacking, you may consider adjusting your retirement resources until proper levels of protection and/or insurance are in place.

Tax savings?

Consumers have been told that, by contributing to their 401(k) plan, they can improve their cash flow. That by deferring taxes, they may have more money in their pocket now. However, one's current cash flow position may not be improved by participating in a 401 (k) plan and may potentially limit their liquidity.

As Caleb Guilliams writes in his book: The AND Asset, a 401(k) has the most restrictions. "It postpones the whole tax bill to the future, and you give up total control of how efficient you can be, To most people, the great appeal to these accounts is the short-term benefit of not paying taxes on the principal or the gain. Little thought is given to the risk of 'kicking the can' down the road and paying taxes at a later date. You will have to pay taxes on all of your money in the future at an unknown tax rate." Here's another way to look at it, as Guilliams describes, "you walk into a bank to get a loan. The bank approves you for the loan and you are thrilled. Before receiving the money, you want to know two things - when will you have to pay the money back and what the interest rate is. The bank tells you that you can pay them back in 30 years, and then tells you the interest rate. There is no way you would take this deal. Yet, this is exactly the kind of offer you might bet utilizing" with a 401(k) plan.

Balance sheet impact
People receive regular statements from their employer indicating their current 401(k) balance. Remember, those statements may not include the future tax liability. When looking at your finances today or forecasting how much money you might have for retirement someday, it is important to look at how much you will get to keep "after taxes,"

Short term liquidity
Your 401(k) plan has limited liquidity features and may trigger tax and penalties if
you withdraw money too soon. So, ensure you have enough liquidity in the event a sudden need for cash presents itself. The loss of a job, college tuitions, divorce, or even an attractive investment opportunity may require ample levels of liquid funds. ln addition, tackling debt can make your 401 (k) strategy even more powerful. The presence of liabilities like credit card debt, student loans, car payments, home equity lines, and revolving credit balances can erode the possible gains inside your retirement strategy. lf you find yourself in debt or without the funds to address an unexpected financial matter ... you should consider how much you are contributing to your 401 (k).

Financial balance is the key.
Building a sound strategy for your retirement is important, and 401(k) plans are often an important element. Being protected, having sufficient liquid funds, living without debt, and having other forms of wealth (personal investments) in addition to your 401(k) itself can provide a more balanced approach. Financial balance is the key. Rather than a one-dimensional approach, see how your 401(k) plan fits into your entire financial picture. Improving your financial balance may allow you to be better protected, build more wealth for the future ... and better distribute that wealth to yourself during retirement,

'Maxing out' might be right for some
From the time you became eligible to participate in a 401(k) plan it was probably drilled into your head that you should "max it out, 'What that means is that, regardless of your overall financial status, you should contribute the maximum amount allowable. While this may be appropriate for some, it may not be the best guidance for you. Let your financial professional help you build a 401 (k) strategy that contains the proper level of financial balance. lt is your life... after all.

Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). 600 Delaware Avenue Buffalo, NY 14202 (716.817.7109) Securities products and advisory services offered through PAS, member FINRA, SIPC. Financial Representative of The Guardian Life Insurance Company of America® (Guardian), New York, NY. PAS is a wholly-owned subsidiary of Guardian. Alliance Advisory Group is not an affiliate or subsidiary of PAS or Guardian. Guardian, its subsidiaries, agents and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation. Alliance Advisory Group, Inc. is not registered in any state or with the U.S. Securities and Exchange Commission as a Registered Investment Advisor. CA Insurance License #0M97999