Early Retirement Blog

Should you invest in a 401k if you plan to retire early?  Yes, IF…

If you are planning an early retirement, you should only invest in your company’s 401k plan if, 1) the company provides a matching contribution, and 2) your 401k is not your only retirement savings plan.

If your company is offering to give you 50 cents, for every dollar you place into your 401k plan, you would be crazy not to take advantage of the opportunity to earn an instant 50% return on your investment. Daniel Indiviglio, in an Atlantic Monthly article, does a very good job of breaking down the numbers, to show why you should take advantage of your company’s matching 401k contributions.

However, if you retire before the age of 59.5, and you need to access your 401k savings, you will pay a 10% penalty on any 401k savings you withdraw.  In these uncertain economic times, it makes sense not to have all your retirement savings in a 401k, in case you are forced into early retirement because of a layoff.

Which brings up point number 2.  If you plan to retire before age 59.5, you should not make your 401k plan, your only retirement savings vehicle.  You should be saving above and beyond, your company’s 401k matching percentage, in non-retirement savings accounts.  So, that when you retire, or if you have to retire before the age of 59.5, you have savings to draw upon penalty-free.

If your company does not offer matching 401k contributions, you should not participate in their 401k plan, if you plan to retire early or in case you need to access your savings before age 59.5.

One last point on 401k’s and early retirement – a 401k plan is not a retirement plan.  Simply placing your savings into a 401k plan, does not take care of retirement planning, does not tell you how much savings you need to retire, or when you can retire.

Also, even if your company offers a 401k and matching, many 401k plans contain under performing funds with very high fees.  So make sure you examine your company’s 401k plan carefully before you invest.

Also Read:
How to Save $1 Million
How to Retire With Less Than $1 Million

Visit our early retirement website, try our free retirement calculators, and learn how to retire early.