What Should I Do With My 401k After Retirement

What Happens To My 401 If I Quit My Job

You have several choices. You can leave your 401 with your former employer or roll it into a new employers plan. You can also roll over your 401 into an individual retirement account . Another option is to cash out your 401, but that may result in an early withdrawal penalty, plus youll have to pay taxes on the full amount.

Create Your Retirement Budget And Retirement Income Plan

As you near your retirement date, consider your budget in the short and long term. In the short term, youll have a last paycheck that may include back pay, vacation/sick days, commissions, or a bonus.

You may also have lag between your last paycheck and when your retirement income kicks in. If you think youll have that gap, consider increasing your savings in the weeks and months before you leave your job, says Heather Winston, assistant director of advice and planning at Principal®. If you still run short, you could also tap into youremergency fund rather than using credit cards to finance day-to-day expenses.

Not sure how to create a post-work plan for income and expenses? Use our retirement budget worksheet .

After youve retired, your retirement income plan may include two sources:

Consider The Size Of The Account Both In Dollar Terms And Relative To Your Other Investment Accounts

If you’re starting a new job, you’re likely starting from zero in your new 401. Since target-date funds can offer a lot of diversification own their own, it’s often a good starting point for new retirement plans. Even if you’ve had a 401 for several years, the account may only be a fraction of your investable assets.

All else equal, as the weight of the 401 increases relative to your entire portfolio, the more important it becomes to ensure the account is managed properly be it by you or someone else.

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K Savings Potential By Age

The following chart depicts 401k savings potential by age, based on several assumptions. So this is how much you could have saved. These numbers can seem high to many people, especially if you are older and started your retirement savings when the contribution limit was much lower. It can still be used as a guide for your target total retirement savings amounts, including your IRA, Roth IRA, and after-tax savings. While its designed for one person, it can also be used as a guide for a married couple if one spouse decides to no longer work.

The assumptions we used for this chart include:

*Generally, financial planners say the expected rate of return for a 401k is between 8% and 10%.

So, how do you stack up? Are you on the high end? The low end? Do you think these numbers are realistic?

Your Retirement Money Is Safe From Creditors

Did you know that money saved in a retirement account is safe from creditors? If you are sued by debt collectors or declare bankruptcy, your 401k and IRAs cannot be liquidated by creditors to satisfy bills you owe. If youre having problems managing your debt, its better to seek alternatives other than an early withdrawal, which will also come with a high penalty.

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Guaranteed Income For Life May Not Be As Good As It Seems

One fairly popular option is to use the money to purchase an annuity, which basically means you’ll receive a steady stream of income for the rest of your life in exchange for a large payment now.

Obviously, the upside to this is that you’ll have a steady “paycheck” for as long as you live, and there is zero chance that you will outlive your money. There are several options when choosing annuities, including options that guarantee payments to your spouse or heirs if you die before a certain time. Here’s a primer on annuities to help you get started if you want more information.

The major downside to an annuity is inflation. In other words, the payments you receive from the annuity will be worth less and less as time goes on. For example, if you buy an annuity that pays you $2,000 a month and the inflation rate averages 2%, those checks will have just $1,336 in purchasing power 20 years from now. You can find annuities with payments that increase over time, but this will cut down your initial income significantly.

After You Retire You Have An Important Choice To Make With Your 401 Account Here Are The Options Available Along With The Pros And Cons Of Each So You Can Determine Which Is Best For You

This article was updated on July 6, 2017, and was originally published on June 13, 2015.

If you’re planning to retire soon and have a 401 or similar employer-sponsored retirement plan, then you have an important question to answer: what happens with your retirement nest egg? You could choose to leave your money in the plan, take a lump sum payout or partial withdrawal, buy an annuity, or roll the money over to an IRA. All of these options have their pros and cons, so let’s see if we can figure out which is the best move for you.

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Move The Money To A New Employers Plan

If you start a new job with an employer who offers a 401 plan, you will be able to roll over your assets to the new plan. This will give your assets the ability to continue growing tax deferred while consolidating into one plan. Most 401s have a wide range of investment options, but you will still be limited to the investment funds offered within the new plan.

Withdrawing When You Retire

After you reach the age of 59 1/2, you may begin taking withdrawals from your 401. If you leave your job in the calendar year when you turn 55 or later, you can also begin taking penalty-free withdrawals from the 401 you had with that current company. If you are a public safety worker, this rule takes effect at the age of 50.

Once you reach 72, you are actually obligated to begin making required minimum distributions or RMDs.

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What Should I Do With My 401

Morningstar’s experts provide answers to seven of the most frequently asked 401 questions today.

Many guides to 401 investing–including Morningstar’s–provide sound advice. Start investing early so compounding can work its magic. Contribute at least enough to get your full company match. And auto-escalate your contributions, if possible.

But given the extraordinary market events and economic climate we’re experiencing today, the standard advice may not fit. Moreover, the CARES Act provides investors with better access to their retirement funds early.

Here are answers to several 401-related questions that investors have during these unique times.

Should I stop contributing to my 401? There might be many reasons to ask this question. Forgoing contributions for a while could provide some extra cash, for instance. Or not putting new money to work in the market may make some feel as though they have more control over their investments.

But not following your investment plan during a bear market can significantly interfere with wealth accumulation over the long term.

Wallace observes that missing the best month of return in a given year can pull otherwise positive returns into negative territory. Her recommendation: Keep investing and take on enough risk to meet your long-term goals.

Average Current Retirement Savings Balance

Unfortunately, many people are woefully under-prepared for retirement from a financial standpoint.

Here are some statistics on the median current retirement savings balances of Americans based on their age.

Workers save more for retirement as they get older and pay off other debts like student loans and a home mortgage.

At a minimum, many experts recommend saving at least 10% of your income for retirement. Dave Ramseys Baby Steps recommend saving at least 15% into retirement accounts after getting out of debt and building an emergency fund.

You can use a retirement calculator like NewRetirement to review your personal progress and project how long your nest egg will last. This tool is free but paid plans are available too.

Read our NewRetirement review to learn more about this interactive retirement planner.

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Taking The Cash Distribution May Cost You

Avoiding cash distributions can save you from taxes and penalties, because any amount you fail to roll over will be treated as a taxable distribution. As a result, it would also be subject to the 10% penalty if you are under age 59 1/2.

Since the taxable portion of a distribution will be added to any other taxable income you have during the year, you could move into a higher tax bracket.

Using the previous example, if a single taxpayer with $50,000 of taxable income were to decide not to roll over any portion of the $100,000 distribution, they would report $150,000 of taxable income for the year. That would put them in a higher tax bracket. They also would have to report $10,000 in additional penalty tax, if they were under the age of 59 1/2.

Only use cash distributions as a last resort. That means extreme cases of financial hardship. These hardships may include facing foreclosure, eviction, or repossession. If you have to go this route, only take out funds needed to cover the hardship, plus any taxes and penalties you will owe.

The CARES Act, enacted on March 27, 2020, provided some relief for those who need to make withdrawals from a retirement plan. It lifted penalties for withdrawals made through December 2020 and provides three years to pay back any early withdrawals.

Average 401k Balance At Age 22

The average 401k balance at ages 22-24 is actually pretty impressive, and indicates that young people using the Personal Capital Dashboard are taking their retirement savings seriously. When youre in your early 20s, if youve paid down any high-interest debt, endeavor to save as much as you can into your 401k. The earlier you start, the better. As you can see from the potential savings chart, compounding interest is no joke.

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Setting A Withdrawal Rate

Aside from the minimum required withdrawal, how much you take out is largely up to you.

The retirement lifestyle you can afford will depend not only on your assets and investment choices, but also on how quickly you draw down your retirement portfolio. The annual percentage that you take out of your portfolio, whether from returns or both returns and principal, is known as your withdrawal rate. Figuring out an appropriate initial withdrawal rate is a key issue in retirement planning and presents many challenges.

Why?

Take out too much too soon, and you might run out of money in your later years. Take out too little, and you might not enjoy your retirement years as much as you could. Your withdrawal rate is especially important in the early years of your retirement, as it will have a lasting impact on how long your savings last.

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Put It To Work Roll It Over To An Ira

One of the options is to roll it over to an IRA account. Seeing as youve left your employer theyre most likely not matching your contribution anymore. The advantages of rolling over to an IRA means there are more investment selections to chose from and you can unify all the various 401k plans you have from the various companies youve worked at into 1 IRA account, a good way to keep things organized and in 1 place. Generally speaking, when you rollover to an IRA there are usually no taxes or penalties incurred with the whole process. Theres also a good chance youll face fewer fees and there are more loopholes when it comes to early withdrawals if needed.

Start Living On A Budget And Tracking Your Expenses

The fact is that until you know where your money is going each month youre going to have a hard time finding money to set aside for retirement savings.

The reason its so important to discover and track where your money is going each month is so that you can identify wasteful spending and reroute it toward causes that are more important to you.

Many people find when they start tracking expenses that they are spending money in $5, $10 and $20 increments that seems like its not a lot but adds up to hundreds or thousands of dollars each month.

When my family started tracking expenses in 2013, we were able to cut them down by nearly $1,000 a month and we were making well under $100,000 per year at the time.

By trimming grocery expenses, cutting back on entertainment costs and being more mindful of each purchase, we found a lot of waste in our spending. We were able to use what we were wasting for much more important things, such as paying off our debt.

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Examine Benefit End Dates

Some benefits may stop the day youre done with work, but others may extend by a set number of days. However, those benefits arent as common as they used to be, says Winston.

This list can help in the retiring transition:

• Upcoming checkups: If you have dental or vision insurance now but wont when you retire, schedule appointments before your last day while those expenses may still be covered.
• Life insurance extension: To convert a voluntary life insurance policy , contact your benefits administrator to get the paperwork started. The difference: Youll pay the premium directly to the insurance company, rather than having it payroll deducted.
• Health insurance and retirement: More on those topics below.

Tip: Enter your employee benefits or human resources department into the contacts on your phone in case you have questions once youre retired.

I Plan On Retiring Next Year But I’m Unsure How To Invest My 401 For Retirement Income Do I Need An Annuity What Do You Suggest

It’s not surprising that you’re uncertain about what to do. Most of us focus our time and attention on growing our nest egg during our career. By the time retirement draws near, many of us find that we’ve given little, if any, serious thought to the critical task of turning that nest egg into income we can count on to support us the rest of our lives.

As for 401 plans specifically, many fail to provide much in the way of meaningful guidance or practical help on this issue. Indeed, a recent Government Accountability Office report found that only a third of 401s have any kind of retirement-income withdrawal option and only about a quarter offer an annuity.

Which is why whether your savings are in a 401, IRA or a combination of retirement accounts, you’ll need to develop a viable retirement income plan before you retire..

The first step toward creating such a plan is to get a handle on how much income you’ll need once you make the transition from the work-a-day world to retirement. Relying on a rule of thumb that says you’ll require between 70% and 80% of your pre-retirement income may be okay for estimating how much you have to save during your working years. But in order to assess how much income you’ll really need when the paychecks stop — and whether the nest egg you’ve acquired is capable of generating that level of income — you want to get a more realistic fix on the expenses you’ll face after you retire.

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Leave 401 With Former Employer

You can choose to leave the money in the 401 plan as you figure out what to do. You can also decide to let the money sit in the plan if you are happy with the investment options provided by your former employer. Your retirement savings will continue growing tax-deferred until you take a distribution, or transfer the money to another retirement account.

If you want the former employer to continue managing your retirement money, your 401 balance must have at least $5000. If your balance is below $5,000, the former employer will force a rollover to an IRA of their choice, or trigger a lump-sum distribution. If the former employer forces a cash out, it will automatically withhold 20% of the distribution for paying taxes.