Retiring, for most people, is the culmination of a long- and hard-worked career. Retiring signifies that you are finally done working! Well, not quite. Retiring is often coupled with mounds of paper work and important life decisions that will have a huge impact on your retirement years. One of these big decisions deals with your hard-earned retirement money. Follow this expert advice on how to best use your 401k account after you retire.
- roll your 401k over to an IRA
- think about your cashflows
- cash part of it out now
- switch to all index funds
- get a second opinion
- become complicent
- forget about your old accounts
- stop investing elsewhere
- put it all in bonds
- forget about taxes
Your first order of business when you retire is taking control of your nest egg. Once you retire you need to roll your 401k into a IRA with a broker of your choosing. Moving your retirement out of your 401k allows you to have complete control of your retirement money, and consolidate multiple retirement accounts into one place. Work with an investment broker who can not only help you roll it over, and invest further.
The primary purpose of investing in your 401k was to support you throughout retirement, while you enjoy your well-deserved work-free life. The last thing you want is your retirement nest egg running out during your retirement. Be sure to look at what your expenses are going to be and play with the numbers to see how long your nest egg is going to last. You may find that you’ll need to be a little stricter when it comes to budgeting for a while to allow your nest egg to grow a little more before you really start using it.
We’ll get to the tax implications of your account in a bit, but cashing out part of your 401k now, in a lump sum, may be a good way to reduce your taxes and increase your options. There are a lot of expenses to cover during retirement and taking a proactive approach to them may not be a bad idea. Taking some of your retirement money and beefing up your health insurance, or purchasing long term care insurance, is a great way to hedge against impending medical expense obligations. Another great strategy is to take some of your nest egg and purchase an annuity, so you have a guaranteed income you can always count on.
Chances are your 401k is full of mutual funds when you retire. Most employers really only offer a limited range of options based upon the company they contracted to manage your retirement funds. Since you're retired and your 401k should have been transferred to an IRA, you are now in charge. The whole market is available for you to invest in.
Index funds offer better performance than mutual funds at a much lower cost. This doesn’t mean you are changing your strategy; just the investments you use to get there. There is an index fund that has the exact same investment objective as the mutual funds that you already hold. Find them and trade in your mutual fund shares for the index funds.
Getting a professional set of eyes on your retirement funds is the best way to insure your hard earned money is well taken care of. A fee-based financial planner can take you through the process of choosing the best options for your individual situation.
If you remember nothing else from this article, remember that compliancy is your worst enemy. You may be done working at your job, but your responsibility to manage your own money is a job you never retire from. It’s okay to take all the time you want sipping a Mai Tai by the pool—you’ve earned it. However, when it comes to your retirement, you must remain vigilant.
Most of us have worked for more than one company over the years. There’s a good chance that there are some 401k accounts floating around out there that you’ve forgotten about from previous jobs. Make a list of your previous jobs and check up on your employment paperwork to make sure there aren’t any accounts that you’ve forgotten about.
You don’t want your eggs all in one basket. As you look at what to do with your retirement funds, you want to be sure that your 401k isn’t the only golden goose you’ve got. As the market changes, so will the value of your retirement which is why it’s important to have funds invested outside of the stock market in case things don’t go according to plan.
One of the biggest mistakes retirees make is believing their stock market days are over. Many planners recommend switching to bond funds that “preserve capital” and “pay interest.” The problem with this is that bond funds behave just like any security. The price fluctuates with the market and current interest rates. Rates are at an all time low, and will be for many years to come. Your retirement nest egg can’t keep growing if you're only willing to invest it at 3% a year. Get some stock index funds and consider income index funds that rely on dividend-paying stocks, instead of strictly bond interest.
Your 401k contributions have been deducted from your tax bill since day one. When you start taking money out, Uncle Sam wants his cut. Every time you take money out of your retirement account, it is going to be taxed as regular income. Thus the more you take out in one year, the higher your tax bracket and the more you're going to have to pay. Then at 70 1/2, you’ll be required to take out a portion each year. When you're looking at your cash flows, it might make sense to take money out early, to space out withdrawals over a period of several years so that your tax bill is lower. You may not need the money immediately, so you can just park it in a CD or savings account for future use. What’s important is you space out your withdrawals so that you remain in a lower tax bracket.
As you can see, there are a lot of considerations when it comes to what to do with your 401k account once you retire. The most important factor to remember is that your job isn’t over. It’s up to you to make sure your hard earned money continues to grow and is protected as you venture into your retirement years. Every situation is different, so I hope this advice has helped to point you in the right direction and highlighted areas where you can improve your retirement plans. Remember, remaining vigilant is the best attitude to ensure success and a financially secure retirement!