Category: 401(k) planning

I’m Retiring Soon—What Do I Do with My 401(k)?

I’m Retiring Soon—What Do I Do with My 401(k)?

As you may have realized, when you reach retirement age, you can pack up all your pictures and favorite fountain pens and desk knick-knacks, but you can’t just toss your 401(k) in a cardboard box, kick open the door, and journey off to new, work-free horizons.

 

You have to decide what to do with the hard-earned money you’ve saved at your employer, a decision that should be thought out carefully, so you can avoid mistakes that may hack away at your retirement livelihood.

 

To get you thinking in the right direction, I’d like to outline all of your options for what to do with your 401(k). Some are much better than others for most people, so I think it will be beneficial to run you through the four common choices retirees make and the potential strengths and weaknesses of each.

 

  1. Do Nothing

That’s right, you could take the path of least resistance and just leave it with your employer. And, surprisingly, there are viable reasons for doing so. For a small one, a 401(k) usually has good protection from creditors. But here’s the big one: keeping your money in a 401(k) will allow you to withdraw without penalty at age 55. Other options are not so friendly to early takers, socking you with penalties if you withdraw before 59 and a half. So, if you are retiring before 59 and a half, this is an important point to consider.

 

However, aside from that, there aren’t too many reasons you’d want to keep your 401(k) with your employer. It limits your investment options. Oftentimes, you can’t get good, individualized management help. And, if you’ve had a string of employers and left a pot of money with each, you’ve probably got a trail of 401(k) accounts following behind you, making your money difficult to manage. Scattered money leads to a scattered brain.

 

In other words, sticking with your employer is not your worst option, but it may be not your best.

 

  1. Take a Lump Sum Distribution—Cash It Out!

To fling us all the way over to the dark side, this is the worst option. In fact, this choice can cause you to loose a third of your 401(k) value in one foul swoop. How? I’ll give you a hint. It has something to do one of life’s two certainties.

 

No, not death…but taxes.

 

When you cash it all out at once, that money becomes part of your income for the year. This will often make you soar into higher tax brackets, and—next thing you know—Uncle Sam can snag tens of thousands of dollars from your hard earned money.

 

 

To take an example, let’s say your yearly income (as a couple filing jointly) is in the 15% bracket ($18,651 to 75,900 in 2017). If you take out a 401(k) with, let’s say, $200,000 in it, this will catapult you up 3 tax brackets to 33%! That’s $66,000 gone, in just one transaction.

 

To put it bluntly, this 401(k) strategy should only be used in emergencies. Even if you want to buy a big-ticket item like a car or a boat or a house, only cash out what you need and, if possible, cash it out in chunks to rein in the tax hikes.

 

  1. Transfer It to a Roth IRA

A Roth IRA is a phenomenal option for 20-somethings wanting to save money for their retirement. However, for the soon-to-be retiree, it usually isn’t. Why? Well, you run into the same tax problem that you do with the second option. Remember the 33% hit?

 

You see, unlike with a traditional IRA, with a Roth IRA, you pay taxes on your money up front. Then, you can withdraw the money tax-free later on. Therefore, the only time it makes sense to convert to a Roth IRA is if you know you will be in a higher tax bracket in the future, when you take it out. For retirees, this is rarely the case.

 

Perhaps a Roth IRA would be a good option if you knew you didn’t need the money, planned to let it grow tax-free until you die and pass it on to your kids. But I’m speaking in extreme rarities now. Most retirees are counting on their 401(k) to live.

 

  1. Transfer It to a Traditional IRA.

The last option is the most popular, and for good reason, too. As far as taxes go, you can transfer it electronically, avoiding all taxes up front. Then you can pay the taxes as you withdraw it, in a reasonable bracket for your income.

 

And, it also wins on many other fronts, fronts that the decision to leave it at your employer doesn’t.

 

For one, you are free to choose from the world of investment options. Like a talent scout seeks out the best players for his team, you can seek out the best performing investments to develop a killer portfolio that is both diversified and matched to your unique risk tolerance.

 

For another, you can consolidate any and all retirement accounts in one, so it is easier to manage.

 

And finally, you can get personalized help. The kind of help that isn’t from a representative to a crowd of employees or from a recording on your phone telling you to “press one to hear more options.” When you rollover your 401(k) to a traditional IRA, you have the option to sit down face-to-face with a professional, certified financial planner and develop that aforementioned killer portfolio together.

Now, it’s important to note that there is a fee involved with working with a financial planner, which is usually 1-2% of the assets he or she manages. Whether or not the fees are higher than the fees you currently pay at your employer is a toss up, so that is something to consider.

 

 

The point is, the decision of what to do with your 401(k) is an important and complicated one. Making the wrong choice can lead to major losses or lost opportunities. That is why we offer a 401(k) planning workshop to help you sort through it all and come to decision you can be confident about. Click here to discover more about our 401(k) workshop as well as our other workshop offerings.

Do You Know How Much Money Your 401(k) Could Lose This Year?

Do You Know How Much Money Your 401(k) Could Lose This Year?

In other words, I’m asking, “Do you know your risk?”

 

But I didn’t ask it that way because I know that, for a lot of people, risk is this abstract, distant, otherworldly life force. They know it has an effect on their portfolio, but not to what extent or—in all reality—how.

 

Tell me if this scenario resonates with you.

You are stuffed in a room with 100 or so of your coworkers of all ages. A well-dressed financial rep enters the room. He’s here to talk about your 401(k).

 

Speaking in generalities, he outlines 5 different portfolios from conservative to aggressive: “If you’re a riskier person, you might want to go with the more aggressive portfolio. If you’re more careful or getting ready to retire, you might want to go with one of these more conservative ones.”

 

After a good amount of explanation, he asks you to choose. So you do…kind of haphazardly. You pick one that you think matches your risk tolerance, or maybe you pick one considered to be “middle of the road”. You’re not sure what you got yourself into, but…hey…how bad can it possibly be?

 

Of course, this scenario plays out in a lot of different ways. But, from my 19 years of experience, it’s typical. The only problem is, it doesn’t reveal what’s really important to you: how much money you could lose or gain. You don’t really understand. You just choose, and risk remains some abstract, otherworldly concept.

 

So let’s get it back into orbit. In fact, let’s land it right in your neighborhood with some meat and bones substance. Do you remember which of those 5 portfolios you chose?

Well…here they are, demystified, showing you in-the-ballpark figures for how much you could stand to lose and gain in a given year:

  • Conservative (33 risk score): -10% or +20%
  • Moderately Conservative (47 risk score): -18% or +32%
  • Moderate (59 risk score): -24% or +40%
  • Moderately Aggressive (68 risk score): -28% or +46%
  • Aggressive (72 risk score): -32% or + 48%

Note: Risk Scores are based on a scale of 1-100 with 100 being the most aggressive.

 

They might have slight variance in risk scores, percentages, and names from company to company. Your particular portfolio may be a bit different, but this is the typical landscape of the 401(k) options offered to you.

 

This means that—with a $100,000 401(k)—you could stand to lose $32,000 with the aggressive option, $24,000 with the moderate option, and $10,000 with the conservative. All in one year.

 

In light of what you chose, how does that make you feel?

If you are comfortable with the loss and gain, you made a good choice. If you’re scared, you didn’t, and you need someone to make adjustments so your portfolio matches your risk tolerance. Simple, right?

 

You have just experienced a wonderful taste of a personalized risk analysis.

This is what I do with my clients. I sit them down. I analyze their portfolio. I tell them what percentage they could lose or gain in a year.  And then I ask a very important, very telling question: “If you were to lose (insert dollar amount of potential loss here), would you be comfortable with that?”

 

They have one of three reactions:

  1. “Oh no, that’s way too much.”
  2. “Yes, I’m comfortable with that.”
  3. “Yes, and I would be comfortable with more loss if it means more gain.”

 

In my practice, working mostly with soon-to-be retirees, I usually get the first reaction the most. And for good reason too! People who will be retiring soon should have a conservative portfolio. They shouldn’t invest aggressively like a 25 year-old because they just don’t have the time to make up for losses.

 

But if they never check the risk of their portfolio, they will never make those necessary adjustments.  And when the economy takes a turn for the worse (eventually it will), they could lose one-third of their money when they need it most. They might even make a fear-based decision to pull their money out, locking them into those losses for good.

 

I don’t usually show so much urgency, but I know how important it is. I’m not going to knock down your door, but I will implore you now.

 

Don’t let this be you.

 

Need a personalized risk analysis at no cost to you? Call Seniormark at 937-492-8800 for a free consultation.

 

Wondering what to do with your 401(k) after you retire?  Consider attending our 401(k) workshop offering, designed to help you answer your most pressing questions. There are no high-pressure sales attempts here, just an in-depth and informative discussion about your options. Click here to discover more.