WHAT CAN BE DONE?
Pensions are becoming a thing of the past. Government and employer provided retirement income is being slowly phased out and individuals are becoming more and more responsible for their financial futures.
Knowledge and preparation can keep you ahead of the curve and give you a better chance of a comfortable retirement. Most of us today are left to assume that contributing to a 401(k) is our only hope for a successful retirement. Here are some low cost alternatives that won’t leave you penny pinching when you should be enjoying life. 
Open a Roth IRA This way you can pay taxes now and the fund grows tax-free. The 401(k) bases your taxable income on how much you withdraw in a given year. With a Roth, you won’t have to worry about how much you take out because the taxes have already been paid. Most online brokerages will give you this option when opening a new account.
Also, most retirement accounts have hefty penalties if money is withdrawn before retirement age. So have a liquid (non-retirement) account that can be easily drawn upon. You may want access to a small portion of your money for emergencies or to use as a down payment on property or to invest in a private business.
What can be invested in an IRA? If individual stock picking isn’t for you, ETF’s (Electronically Traded Funds) may be a better option than mutual funds. ETF’s can give you the diversification of a mutual fund at a fraction of the cost.
Don’t scrap the 401(k) plan all together though, especially if you have an employer match. If possible pay the plan all the way up to the match (because it’s free money). Then, supplement it with tax-free holdings and a more liquid account.
Happy investing.
Some thoughts from people much smarter than I am:
http://money.cnn.com/2007/10/08/pf/expert/expert1.moneymag/index.htm?section=money_pf (Fred’s article)
http://robots.cnnfn.com/2007/09/25/pf/expert/expert.moneymag/index.htm
http://www.investmentu.com/IUEL/2005/20050929.html
http://financialrevolution.blogspot.com/2006/03/why-you-can-beat-market-mutual-funds.html
The Terrible Truth About the 401(k) | Young Black Professional Guide
[...] And stay tuned for some low cost alternatives! Part 2 [...]
October 11, 2007 at 2:51 pm
UMO
Just a point of clarification. You DO have to worry about how much you take out of your I.R.A. The only tax-free, penalty dollars that you can take out are your own contribution dollars. In earnings in the account will be taxed and penalized if taken out early unless the withdrawel is exempted.
October 12, 2007 at 1:35 pm
Fredric
woohoo!
roth 401k’s! i gotta get me one of these!
http://money.cnn.com/2007/10/05/pf/retirement/cash_from_401k.moneymag/index.htm?section=money_pf
October 12, 2007 at 3:22 pm
freedough
I’m not sure I’m interested in letting go of the free money my company matches if I contribute.
October 12, 2007 at 4:56 pm
Blackbird
Why not just evenly distribute among the two? Put an adequate amount in your 401(k) so you get the matching contribution but contribute an amount to your Roth IRA so that over time you have that tax free amount availible at retirement.
January 8, 2009 at 8:12 am