Why Young Professionals are Ditching 401(k)s for a Better Retirement Plan
Embracing Flexibility and Tax-Free Growth: The New Approach to Securing Retirement
401(k)s were initially introduced to encourage Americans to begin saving for retirement. They had been considered the easiest retirement-planning tool to use because of defined contributions that were automatically deducted from each paycheck, set investment funds to choose from for accruing interest, and the potential to have an employer match contributions.
For any working professional planning to stay at their current company until retirement — specifically at age 60 — and earning enough income to support all of their other major life expenses and investments separately, this is likely still a viable retirement-planning option. However, with the continual increase in cost of living, and the differing career trends of younger generations, it is no surprise that young professionals are seeking new and more flexible options for retirement planning.
Generation Z and Millenials account for 42% of the current U.S. population and are extremely diverse in their career aspirations. This part of the population is generally searching for work with an emphasis on higher salaries and opportunities for advancement, and will remain loyal to any company that can fulfill this, but many find it difficult to imagine working at just one company for a majority of their professional careers because job changes typically come with significant pay raises.
This alone means that 401(k)s are no longer the best viable option for young investors because it can be difficult to switch those accounts to new employers multiple times over before the age of 59 ½ and a huge loss to accept the stunted growth of leaving funds with an old company.
While chasing higher income, young professionals also come to know the drain of taxes and management fees all too well. Not only do 401(k)s have costly fees, but if they were to ever be accessed too early — without meeting qualified distribution requirements — there would be an additional 10% tax on the regular income tax due.
Worth mentioning as well are the annual contribution limits and required minimum distributions (RMDs) that investors must begin to withdraw once they reach age 73. Any leftover amounts at the time of passing can be withdrawn or rolled-over into another retirement account.
So, young professionals are asking the question, “Why pay future tax on required withdrawals, if a tax-free and flexible alternative exists?”
What is now trending as that alternative is using life insurance — whole and universal policies — to provide accessible investment money and tax safe-havens for retirement funds. As a general rule, the younger you purchase life insurance the cheaper it is because the insured is at a lower health risk. With a guaranteed insurability rider (add-on), the insured can keep their low premiums for the rest of their life even when extending coverage and health has declined.
So by investing in insurance policies earlier, up and coming generations are making it more affordable for themselves to build up the value of their cash accounts to be able to take out cash withdrawals and loans. There will be no interest and no tax due as long as the insured follows the main guidelines of not taking out a loan larger than their total cash policy value and paying the loan back.
In terms of building wealth and enjoying retirement, life insurance provides the ability to supplement retirement income while continuing to earn from contributions. Policy holders can contribute as much as they want above their minimum premium payment and if the total cash value amount is reached, more insurance can be purchased, while withdrawing as little or as much as they need. Once the insured passes on, the death benefit is paid out completely tax-free — subtracted any outstanding loan amount — and loved ones are able to use as they see fit, including reinvestment. Thus begins the accumulation of real generational wealth.
401(k)s definitely play an important part in enabling Americans to save for their retirement and encouraging greater financial literacy in this area. However, it’s now clear that the changing needs of our younger generations are fueling even greater literacy in exploring investment alternatives. The possibilities associated with life insurance have become a strong, viable option for many working professionals and I would encourage everyone, at any age, to take an interest in their own options for more effective saving and investing.
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