Financial Focus: Saving and investing beyond retirement accounts – williamsonherald.com

If you seek financial advice from financial media outlets, you’ve probably heard them recommend taking advantage of tax-advantaged savings from retirement accounts. While 401(k)s, IRAs and other similar retirement plans can be very good ways to build long-term wealth, they probably shouldn’t be your only form of savings and investment. 

I often come across investors who are “401(k) poor.” They have large 401(k) balances, but no other substantial investments. When it comes to saving for goals other than retirement, this heavy focus on these tax-friendly investments can limit funds for more immediate needs.  

The tax advantage of a 401(k) is quite compelling. In addition to the potential for tax deferment on those contributions and earnings, many employers also provide matching funds of some form as an incentive to get employees to contribute. Many of these matching funds become vested over a period of years to give employees an incentive to remain with the company. These funds can usually be rolled over to another plan if you leave the company or retire, so a 401(k) is usually easy to move or transfer.   

But what if you are saving for a something other than retirement? Pre-tax retirement plan contributions and earnings are taxed as income when they are withdrawn. Also, there are penalties for early withdrawal, such as a 10% penalty for withdrawals before age 59 1/2 if you don’t meet one of the exceptions to the rule. So, if you are wanting to use some of your investments for your next car or your child’s college expenses, a 401(k) might not be the best source of funds. Planning a big family vacation in a few years? Again, the retirement plan is probably not the best source of funds. 

People have probably told you to max out your 401(k) contributions or always make the maximum IRA contribution. While this isn’t bad advice, you also need to build investments that support the goals in your life that might require you to withdraw funds before retirement age. Even if you don’t have a goal right now that would fit that category, life has a way of surprising all of us from time to time, so it’s important to have funds that we can access at any age, for any reason.  

In addition to saving and investing to build wealth, it’s also important that you are adequately protecting yourself from catastrophic events. I often come across people who are maxing out retirement contributions but don’t have an adequate amount of life or disability insurance in place. Others may be maximizing their retirement plan contributions, but do not have an adequate reserve fund for short-term emergencies.

In short, don’t assume just because you hear or read a generalized piece of advice that it applies to you. Make sure that you are always looking at your overall financial situation and make smart decisions based upon your own unique circumstances.

For more information on Southern Springs Capital Group, visit www.southernspringscapital.com. Our offices are located at 2555 Meridian Boulevard in Franklin. We can be reached at 615-905-4585. 

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