Two Truths and a Lie about 401(k) Plans

By Stuart Robertson

Have you ever played the game “Two Truths and a Lie?” If not, the concept is simple. Out of three statements, you need to figure out which one isn’t true. Let’s play this game to see how much you know about savings and retirement.

Out of these three statements, pick the one that’s a lie:

  • Only 4 in 10 adults have enough savings to cover an unexpected $1,000 expense
  • Over half of Americans feel they haven’t saved enough for retirement
  • 6 in 10 Americans will need to qualify for a retirement loan to retire

According to Bankrate.com, the first bullet is true. Most U.S. adults do not have enough cash to cover an unforeseen bill of $1,000. In fact, 25% of people would use a credit card to pay for these expenses, the highest percentage we’ve seen in the last decade.

The second bullet is true too as referenced by Bloomberg. Looking at both of these points leads us to believe that most Americans don’t have enough money now, nor will they in the future.

This leaves the last bullet, which you now know is a lie. You can get a loan for a car, college, or a home, but you can’t get a loan for retirement. A loan is typically collateralized with an asset like a car or a home. Even a student loan is somewhat managed by a career of future earnings.

No bank is currently nor is one likely in the future to create a loan type specifically for retirement. You will be reliant on your savings, any assets you might sell, and maybe a bit of Social Security to fully retire.

So, if you’re looking to build for financial security in the future, a great option is contributing to your 401(k) account. If you don’t have access to a 401(k), an IRA can be a good choice. If you are small business or self-employed, you can start a 401(k) plan if you don’t have one yet.

Let’s talk about how a 401(k) can not only help you retire comfortably but can also assist in the event of an emergency.

Plan a Secure Future with a 401(k) Plan
Experts recommending putting between 10 – 15% of your salary into a retirement plan to enjoy a comfortable lifestyle during your golden years. Workers are now contributing an average of 14% of their paychecks to their retirement accounts — so, pretty much right on track with the standard recommendation.

Due to rising costs, inflation, and our ability to live longer, the need to save is only getting more important. Plus, healthcare costs can add up quickly — the better you’re prepared, the more enjoyable your retirement.
In 2023, for those age 49 or younger, you can put up to $22,500 in your 401(k) account annually. If your employer offers matching or profit-sharing contributions, you can stash up to $66,000 in total contributions. If you’re age 50 or more, you can also make up to $7,500 in catch-up contributions, for a grand total of $73,500.

401(k) Emergency Withdrawals
While you want to keep monies in your retirement accounts, so you can retire comfortably, emergencies can happen. Many don’t have 3-6 months of cash on hand to manage through bigger emergencies if one arises. Your 401(k) can help. Many 401(k)s have a penalty-free loan provision that allows you to borrow from your 401(k) and then you pay yourself back each payroll.

Any other withdrawal from an IRA or 401(k) if you are under 59 ½ years old is a bad idea as you must pay taxes on it and will be hit with a 10% tax penalty too. There is some good news on this front for 401(k) users who don’t have a loan option supporting their company’s 401(k) benefits. Starting in 2024, the Secure Act 2.0 legislation allows savers to withdraw up to $1,000 from their 401(k) plan, penalty-free. Those affected by a natural disaster or have suffered domestic abuse can qualify for a higher amount. These withdrawals can be paid back into the plan as long as it’s done within three years to avoid taxes. If you do make an emergency withdrawal, it’s a real good idea to pay your 401(k) back as soon as possible.

Start a 401(k) Plan and Fund It Well
If you’re a business owner, but don’t have a 401(k) already started, or you have access to one and are not contributing, don’t wait any longer to prepare. Your future self will thank you and you’ll have a lot more flexibility to manage your finances.

Have questions about starting a 401(k) plan? Give us a call at (800) 431-7934 option 1 and one of our 401(k) advisors will be happy to guide you.

Meet the Author

Our low-cost 401k plans are easy to setup online and are supported by our 401k advisors and specialists. ShareBuilder 401k serves small business and medium-sized companies, as well as the self-employed. We offer Roth 401k, Safe Harbor 401k, Traditional 401k, and Solo 401k options. Your 401k plan is paired with investment management expertise and employee education to help you save more.