For many Americans, their 401(k) is their single largest retirement asset. It’s easy to see why so many people accumulate a large chunk of their retirement funds in an employer 401(k) plan. In most cases, you can contribute to your 401(k) directly through deductions from your paycheck, making it easy to save. Your employer may even match a portion of your contributions, boosting your savings level.
Your 401(k) plan is also tax-deferred. That means that as long as the funds stay in the account, they can accumulate without facing taxes. That may allow your 401(k) funds to compound at a faster rate than if you’d saved in a taxable account.
In many ways, a 401(k) plan makes for a very effective accumulation vehicle. After you retire, though, you may need for your 401(k) plan to become a distribution vehicle. After all, you will likely need income from your retirement assets to fund your desired lifestyle.
If you’re approaching retirement, have you considered how to manage distributions from your 401(k)? Do you have a strategy to make sure the funds and the income last through your lifetime? If not, now may be the time to think about that challenge. Below are a few helpful questions to consider:
How much income do you need?
This is an important question to answer for nearly every aspect of retirement planning, not just with regard to your 401(k). How much income will you need to take on a regular basis from your retirement assets? And what changes can you make to limit the amount you take from your retirement plans?
The first step in answering this question is to develop a projected retirement budget. Rather than ball-parking your income needs, document your planned spending and put the numbers on paper. Also, project your income from sources like Social Security, pension plans and more.
Then compare your income numbers with your planned expenses. If you have higher projected income than expenses, you’ll need to fill that gap with distributions from your 401(k) plan. Consider adjusting your spending to minimize those withdrawals.
What is the right investment mix?
When you’re in accumulation mode, you may have a higher tolerance for risk and downside movement in your investments. After all, you don’t need the money at the time, and you’re constantly adding contributions to the account, so you may not feel the impact of market downturns.
In distribution mode, however, you may be more sensitive to those downturns. You’re no longer adding money to the account. On the contrary, you’re pulling money from the account, so you may be more aware of losses.
Take time to review your investment allocation, your need for income and your sensitivity to loss. Think about what types of investments may better meet your risk tolerance and needs as you withdraw money. If your 401(k) doesn’t offer investment options to meet your needs, consider rolling your funds into an IRA after you retire. The IRA may offer a much wider lineup of investment choices.
How can you guarantee* your income?
For many retirees, one of the biggest fears is running out of money. It’s a possibility, especially considering that your retirement could last multiple decades. You may want to consider ways to guarantee your retirement distributions through your lifetime.
For example, many annuities offer a variety of ways to create a guaranteed lifetime income stream. Some also offer the opportunity to get upside growth with limited downside risk exposure. Generally, these types of tools are available inside an IRA account but not in a 401(k).
Ready to develop your 401(k) retirement distribution plan? Let’s talk about it. Contact us today at Bridgeriver Advisors, so we can help you examine your needs and create a strategy. Let’s connect soon and start the conversation.
*Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values.
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