If retirement is quickly approaching, this is likely a busy time. You may be making many decisions, both personal and financial. When should you file for Social Security? Is now the right time to downsize? What will you do with all your free time in retirement? How should your investments be allocated?
Some of your biggest decisions may involve your 401(k) plan. That’s especially true if you’ve been with the same employer for many years. Your 401(k) may be your largest retirement asset.
For decades, you have made regular contributions to the plan and monitored your investments and their performance. Now it’s time to switch gears. Instead of putting money into the plan, you’ll be taking money out. That may require a different mindset and a different strategy.
You have many options with regard to what you do with your plan after you retire. Below are some important questions to ask yourself to determine which strategy might be best for you:
Should you keep the funds in your 401(k) plan or roll them into an IRA?
There’s nothing saying you have to do anything with your 401(k) balance. In fact, unless you have a very low balance, you can keep your funds in the plan for as long as you’d like. You can keep the same investments and continue to use the same online portal and customer service platform.
However, you may find that you’ll have more options available if you roll your funds into an individual retirement account, or IRA. If you do a rollover, you won’t pay any taxes or penalties when the funds leave your 401(k) plan. Many IRA custodians offer a wide range of investment options, giving you more control and flexibility than you might have with your 401(k).
You could also consider rolling your funds into a Roth IRA. A Roth allows you to take withdrawals on a tax-free basis in retirement, which may give you more financial stability. To roll your funds into a Roth, however, you’ll need to pay taxes on your 401(k) pretax contributions and growth.
What allocation is right for you?
During your career, you were earning income and putting money into your 401(k) plan. Thus, you may not have been as sensitive to volatility and risk. However, in retirement you won’t be earning income, and you may even be withdrawing funds. A steep decline in the markets could make it more difficult for you to generate the income you need.
This could be a good time to reassess your allocation and determine whether more conservative options may be more appropriate. Also, if you roll your funds into an IRA, you may be able to take advantage of tools that help you minimize risk. A fixed indexed annuity is one example of a tool that allows for growth potential but also limits downside exposure.
How much should you take in withdrawals?
If you’re like many retirees, you will need some level of supplemental income from your retirement savings. The question comes in determining what level is appropriate. Take out too little, and you may not be able to support your lifestyle. A withdrawal rate that’s too high may deplete your account and make it difficult to fund the later years of your retirement.
What’s the right withdrawal rate for you? That’s a difficult question to answer. It depends on your unique needs, goals and concerns. Also, in an IRA you may be able to use tools such as an annuity to generate a guaranteed* stream of income that lasts your lifetime regardless of market performance.
Unsure of how to answer these questions? Let’s discuss it. Contact us at Bridge River Advisors in Bloomfield Hills, Michigan. We can help you analyze your 401(k) plan and explore your options. 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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