Making Sense of Your 401(k) in Retirement
You've put in the hard work during your career, diligently saving in your 401(k). But now that retirement is on the horizon, how do you go about managing those savings effectively?
Mapping Out Your Income in Retirement
A crucial aspect to consider as you retire is how you'll generate a steady income stream from your savings—essentially, your retirement paycheck. If your 401(k) plan allows for regular withdrawals or installment payments, you might find it beneficial to keep your funds within that plan.
Understanding Your Options
Many employers now offer the flexibility for retiring employees to specify, “Disburse X dollars each month,” which simplifies the process of accessing your funds, explains Steve Vernon, author of “Retirement Game-Changers” and a research scholar at Stanford Center on Longevity. However, every 401(k) plan differs significantly; some permit only lump-sum payouts, while others restrict periodic withdrawals. Should your 401(k) lack the necessary options for managing your funds effectively, consider transferring your savings to an individual retirement account (IRA) for more flexibility.
Evaluating Fees and Expenses
Before making a move, it’s essential to look closely at your 401(k) distributions. Take notes on any fees you may be incurring, including both investment expense ratios and administrative charges. If you notice that your mutual-fund expense ratio exceeds 1%, it's likely time to explore better, more cost-effective options—aim for closer to 0.20% if possible.
Choosing Between a 401(k) and an IRA
As you weigh your options between keeping your 401(k) or rolling over to an IRA, ask yourself some critical questions: Does an IRA offer more favorable payout options? Are the costs lower? Does it provide a broader selection of investment choices? If you're at a large company, there's a good chance your 401(k) offers low-cost investment opportunities. Balancing low costs, strong payout options, and investment choices can make your 401(k) a suitable option even in retirement. However, if you find your plan lacking in any areas—whether it's high fees or limited withdrawal options—an IRA may be your best bet.
Calculating Your Retirement Income
Next, you'll want to strategize about your monthly income sources and how much you'll draw from your savings. A crucial step is ensuring your retirement income exceeds your anticipated expenses, so start by estimating what those expenses will look like. From there, determine which accounts to draw from first and how much to withdraw. A useful strategy might be to adopt the IRS formula for required minimum distributions. For further insights, check out our resource on this topic.
Timing Social Security Benefits
Additionally, consider delaying your Social Security benefits. For each month you postpone claiming those benefits, your eventual monthly payout increases. By waiting until age 70 to claim, you will secure the maximum monthly benefit available.
Leveraging Social Security
As Steve Vernon notes, Social Security can provide one of the best forms of retirement income available. Its benefits are adjusted for inflation and promise stable income, making it a cornerstone of your retirement plan.
