401(k) Plan ~ (Q&A)

Jul 2019


Dear Rick:
I graduated college in June and I recently got a job that I will start in a couple of weeks. I have a couple of questions regarding my benefits, and my dad told me I should write you. My first question is my 401(k) plan. Everyone is telling me I should invest in my 401(k) plan, but the question is do I use the traditional 401(k), or do I do a Roth 401(k)? My second question deals with life insurance. The company provides me with $50,000 of life insurance but allows me to buy more. I can buy an additional $200,000 of life insurance if I choose. Do you think that is a good investment?

Thank you.

Dear Doug:
First of all, congratulations on graduating from college and getting your first job. I’ve always told people that the best investment you can make is in a good education and you have done that; so, congratulations.

With regards to your 401(k) plan, especially considering your age, I would recommend the Roth IRA. The advantage of the Roth is that eventually upon retirement when you begin to withdraw the money, your entire distributions will be tax free. Ask anyone who is taking money from their retirement accounts how great it would be if they didn’t have to pay tax on their 401(k) withdrawals. In addition, the Roth 401(k) gives you greater flexibility, in that upon retirement you can transfer that money into a Roth IRA and thus be excluded from minimum required distribution rules. Therefore, when you eventually retire, you will have much greater flexibility when you withdraw the money. Of course, there is a downside to a Roth 401(k) in the fact that your contributions are going in post-tax versus if you use the traditional 401(k) where it’s going in pre-tax. However, my thought is the fact that you probably would not begin withdrawing this money for at least 40 to 50 years. The fact that you can withdraw that money tax free would give you a huge advantage. Therefore, I would strongly recommend that you use a Roth 401(k).

With regard to life insurance, I first want to stress that life insurance is not an investment. Insurance of any kind is a means of handling risk as opposed to an investment. I believe when it comes to life insurance the question you should ask yourself is if you pass away does anyone lose out financially. If the answer is no, then you do not need to buy additional life insurance. On the other hand, if you had dependents who would lose out financially if you pass, then probably additional insurance is needed. In that regard, if you do require additional insurance, you’ll have a couple different options. Not only can you purchase the insurance through work, but you can also consider purchasing a term insurance policy on your own. There are a few benefits by purchasing the insurance on your own. First, you can shop it around and receive competitive bids. The other benefit is that if you purchase the policy through your employer and you leave that employer, you may lose your insurance. On the other hand, if you bought the policy on your own and you change jobs, your policy would be unaffected.

One last note and that is with regards to your 401(k) plan. I strongly recommend that if possible, you put the maximum you can into your 401(k) plan. My reasoning is that I cannot stress enough how important it is for you to save for your retirement. Someone your age may find that when they do retire, Social Security is not what it is today. In addition, the likelihood that you will qualify for a pension is very slim; thus, your retirement is dependent upon you. Furthermore, let’s not forget that people are living longer, and thus it would not be beyond the realm of possibility for someone like you who retired in their mid-60s to spend 40 years in retirement. I can assure you that living in retirement for 40 years is going to be expensive. The fact that you can start saving for your retirement now will put you in a much better position when you retire. Remember, when it comes to investing, the key is not timing the stock market, but time in the stock market. If you fully fund your 401(k) throughout your career and invest the money in a well balanced and diversified portfolio, I can almost assure you that when it comes time for retirement, the issue won’t be if you have the money to retire, because you will.

Once again, congratulations on your new job; I wish you much success.

Good luck!


Rick is a fee-only financial advisor. If you would like Rick to respond to your questions, please email him at Rick@bloomassetmanagement.com.