You’ve probably spent years, even decades, diligently contributing to your 401(k) plan. You’ve taken advantage of employer matching contributions, managed your investments and possibly even made catch-up contributions after age 50. Now retirement is quickly approaching, and you’ve started to wonder what you should do with your 401(k) after you leave the working world.
Many workers view their 401(k) plan as an accumulation vehicle. That’s a correct perspective while you’re working, but after you retire, the 401(k) may be a distribution tool. If you’re like many retirees, you’ll need income from your 401(k) and other investments to fund your lifestyle. The question is how to best utilize your plan to manage those distributions.
You have a few options available. Before you choose the option that’s best for you, though, you should ask yourself some questions about your risks, concerns and goals. Below are a few questions to consider. Your answers should give you guidance on how best to manage your 401(k) plan after retirement.
Should you roll your 401(k) funds into an IRA?
There’s nothing saying you have to do anything with your 401(k) funds. In fact, in many cases you can leave your funds in the plan indefinitely even if you are no longer with the employer. If you’re comfortable with the investment options and the plan’s service capabilities, you may wish to stay in the plan.
However, you may find that rolling your 401(k) funds into an IRA is a preferable strategy. With an IRA you can often choose from a wide range of investment options, far beyond what is usually available in a 401(k). An IRA may give you the flexibility and capability to find investments that better align with your risk tolerance and growth needs.
What’s the right allocation for you?
When you were working and contributing to your 401(k), you may not have been as sensitive to risk. In retirement, that could change. After all, you will likely be dependent on your retirement distributions to fund your lifestyle to some degree. As you begin to withdraw money, you may become more risk-averse.
The challenge is to find investments that not only limit your downside exposure but also provide growth opportunities. Many investments that have little risk also have little growth potential. That can be an issue, because you will likely need growth to combat inflation and support your withdrawals.
There are some financial tools, such as fixed indexed annuities, that offer protection against loss but also offer upside opportunity. However, those tools often aren’t available in 401(k) plans. To access those tools, you may need to roll your funds into an IRA.
What level of withdrawals should you take?
Another important decision point is in what level of withdrawals you should take from your 401(k) funds after you retire. It’s a tricky decision. Take too little, and you may not have enough to support your desired lifestyle. Take too much, and you may drain your 401(k) funds, putting yourself in a challenging position later in retirement.
It’s hard to determine the appropriate withdrawal level without first developing a retirement budget and a projected income plan. Once you understand your expenses and your estimated income, you can then make an accurate and informed decision about potential distribution