We Asked ChatGPT To Break Down 401(k) Basics — Here’s What It Overlooks
Though increasingly popular, 401(k)s are not terribly easy to understand, let alone navigate. So how could one learn the basics of what a 401(k) plan entails in a way that's simple and digestible to the average person?
We asked ChatGPT to explain 401(k) plans to us like we're 12 years old. The explanation it provided is very simple and, at times, overly so. It was also a little too lighthearted and didn't even attempt to hit home the vital importance of retirement planning with a 401(k). Regardless, here's what the AI had to say:
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A Piggy Bank for Your Future
A lot of kids grow up with piggy banks, so they'll get the metaphor ChatGPT gave -- that a 401(k) plan is a piggy bank for your future.
"Instead of using it to buy toys or video games, you use it when you're older and stop working (that's called retirement)," it explained.
Here was a (missed) opportunity for ChatGPT to provide more context. For example, it could have said this piggy bank should be thought of as a necessity because it's money you need to literally survive eventually. Dark as that may be, the fact is that many retirees slip into poverty because they didn't invest in 401(k) plans. Therefore, it's worth mentioning this grim reality -- and especially pointing out that they can avoid it.
Only Accessible Though Employers Who Provide Them
ChatGPT said once you grow up and get a job, you say, "Hey, I want to save some of my money for the future!"
ChatGPT could have been more pointed and urgent. It could improve by saying "I need to save some of my money..." rather than "I want to save some of my money..." It could also briefly touch on the consequences of not saving for retirement.
The chatbot then explained that your job takes "a little bit of money from your paycheck (before taxes) and puts it into this special 401(k) account." That money you plant in a 401(k) plan grows "into a money tree." So far, this is the most astute perception ChatGPT has generated.
This Is Free Money -- but It Comes With a Major No-No
ChatGPT described a 401(k) plan as free money -- not unlike how financial planners explain it, so that's fair. That free money is when your employer contributes a match, which is common. In many cases, 401(k) matches are between 3% and 6% of your salary.
ChatGPT also highlighted the severe rule that comes with these plans: You can't withdraw the money until you're older (usually around 59½ years old). If you do, you'll pay a penalty.
"So it's long-term saving, not like your piggy bank for candy," the chatbot said. This is a kind of cute way of saying you have to be wise and future-minded with your 401(k) plan, but it's also sort of incoherent. The explanation would be better without this cutesy wrist slap about candy.
401(k) Plans Build Up Money With Time
ChatGPT concluded its explanation of 401(k) plans by describing why they're "awesome" and provided the following points:
You save money automatically.
Your boss might help.
It grows over time, thanks to investing.
You'll thank yourself when you're old and want to chill on a beach.
The first three bullet points are spot on. The last one is obnoxious malarkey. It suggests 401(k) plans are basically stashes of fun money for old people, when they are, in fact, core pillars of financial security, no matter your wealth status or income level. You should know this regardless of how young you are. In fact, the younger you know this stuff, the better.
Human Recap: How Does a 401(K) Work?
Here are a few key takeaways on 401(k)s, without AI assistance:
A 401(k) is an employer-sponsored retirement plan that comes with tax benefits. In other words, you invest money into the 401(k) account where it can hopefully grow tax-free over time.
Generally, you choose how much money you want to contribute to your 401(k) based on a percentage of your income. Your employer will then automatically withhold a portion of each paycheck and put it into the account, making it easy to regularly contribute.
If your company has an employer-matched contribution, make sure to maximize your own contribution percentage so you aren't leaving money on the table.
Keep in mind that many employers now offer a Roth 401(k), also known as a designated Roth account. Contributions to Roth accounts are made with after-tax dollars, which means you don't get a tax deduction, but your money can typically grow tax-free and be withdrawn in retirement.
401(k) plans tend to offer different investment options, including mutual funds, exchange-traded funds (ETFs), target-date funds, index funds, money market funds and individual stocks and bonds.
Caitlyn Moorhead contributed to the reporting for this article.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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