How Much Do You Need In Your 401 To Retire
Saving for retirement is one of the most important financial planning goals for most Americans. However, the question of how much youll need to retire is often quite personal and uncertain. But for many American workers, a 401 plan is the vessel used to save for retirement. Figuring out how much you should have in your 401 at any point in your career and at retirement can be challenging. Youll have to take into account a number of things, including where you want to live, what you expect your lifestyle to be and when you plan you retire. If you have in-depth questions about your retirement plans, consider working with a local financial advisor.
When You Retire You Have To Decide What To Do With Your 401 Money Generally Speaking You Will Have Some If Not All Of The Following Five Choices: Leave Your Money Parked In The Plan Take A Lump
Keep in mind, not all employers allow retired workers to remain participants in their 401 plan, but if yours does, here’s a quick look at the pros and cons of the various distribution options:
If you need a wad of cash right away, this option will serve that purpose. There are two key downsides: you forfeit the benefits of tax-deferred compounding by cashing out all at once and you’ll have to pay income taxes on your distribution for the tax year in which you take it, which can be a big bite out of your nest egg all at once.
Leave the money as is
Financial advisers often recommend retirees tap taxable accounts first in order to keep as much money growing tax-deferred as possible.
So if you’re retiring and have money outside of your 401 that you plan to live on, you may leave your account untouched until you’re 70-1/2. That’s when Uncle Sam requires all retirees to begin taking mandatory annual distributions from their 401s and traditional IRAs.
Of course, if your plan’s investment choices are very limited or have performed poorly relative to their peers, you might be better off rolling the money into an IRA.
Rolling money into an IRA
This is the option often recommended by financial advisers since an IRA offers greater investment choice and control, and is especially recommended if your plan has few investment options and not very good ones at that.
There are two advantages your 401 has over an IRA.
Why A 401 Might Underperform
A 401 plan is an investment vehicle and as with any investment, high returns are not guaranteed. In fact, returns aren’t guaranteed at all the way they might be with something like a certificate of deposit account or low-risk bond. That being said, there are a few reasons why your plan may be delivering lackluster performance.
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Why Not Just Take It All
If you’re over 55 and are no longer working, or are over 59-1/2 regardless of your employment status, then you can withdraw your entire account balance in one lump sum. However, this is rarely a good idea, especially if you have a large amount of money in the plan. In addition to losing the creditor protection I mentioned earlier, you could incur severe tax consequences, as the money you withdraw from a 401 counts toward your taxable income.
For example, if you have a 401 account with more than $418,401 in it , a lump sum withdrawal could put you in the highest tax bracket for this year, even if you had no other income. This could take a serious and unnecessary bite out of your retirement savings.
Move Your Old 401 Assets Into A New Employers Plan
You have the option to avoid paying taxes by completing a direct, or “trustee-to-trustee,” transfer from your old plan to your new employer’s plan, if the employer’s plan allows it.
It can be easy to pay less attention to your old retirement accounts, since you can no longer contribute. So, transferring old 401 assets to your new plan could make it easier to track your retirement savings.
You also have borrowing power if your new retirement plan lets participants borrow from their plan assets. The interest rate is often low. You may even repay the interest to yourself. If you roll your old plan into your new plan, youll have a bigger base of assets against which to borrow. One common borrowing limit is 50% of your vested balance, up to $50,000. Each plan sets its own rules.
Here are a few important steps to take to successfully move assets to your new employers retirement plan so as not to trigger a tax penalty:
Step 1: Find out whether your new employer has a defined contribution plan, such as a 401 or 403, that allows rollovers from other plans. Evaluate the new plan’s investment options to see whether they fit your investment style. If your new employer doesn’t have a retirement plan, or if the portfolio options aren’t appealing, consider staying in your old employer’s plan. You could also set up a new rollover IRA at a credit union, bank, or brokerage firm of your choice.
The instructions you get should ask for this type of information:
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Put Yourself In The Driver’s Seat
Finally, you have the option of rolling over your account into an IRA, which is my favorite option out of the four mentioned here.
With an IRA, you’ll have the same tax treatment as leaving your money in the 401, but with more flexibility. Specifically, in an IRA you can invest in any stock, bond, or mutual fund you want, and even if you choose to stay in funds like those in your 401, you may be able to find lower-fee options through an IRA.
It’s true that an IRA is likely to require a little more effort on your part than simply leaving the money where it is, but in my opinion, the gaining total control of how your retirement nest egg is invested is worth it.
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Planning Changes To Your 401 Retirement Account
Your decision may be time-sensitive because, if you take a distribution from your existing plan, you have 60 days to roll it into a new qualified plan. Otherwise, you would face tax consequences.
Its best not to rush this kind of decision. So, as soon as you think you might be leaving your employer, you should start looking into your options. Thats important whether you are fully retiring, semi-retiring or simply changing jobs.
Weighing your options as soon as you know you will be making a change will give you time to do your research and work with a financial advisor toward the best outcome.
A Closer Look At Your Available Options
The good news is whatever money thats in your 401 is yours to do with as you like. But when you no longer work for a company, any retirement accounts you have through your former company might need to be moved to your new employer. Or you may need to roll it over or into a brokerage account that you own completely.
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Your 401 Savings And Your Desired Retirement Lifestyle
How you want to live out your golden years is another huge factor in what your 401 savings will need to look like. Thats because retirement has evolved over time to become a more active time of life. Its now viewed as a new beginning to our lives rather than a beginning of our end. That shift in mindset has driven the need for additional sources of retirement income.
The Employee Benefit Research Institute study on the Expenditure Patterns of Older Americans shows that as we age our expenses decline. Using age 65 as a benchmark, the study found that household expenses drop by 19% by age of 75 and 34% by age 85. The study also found that people over the age of 50 spend 40-45% of their budget on their home and home-related items. The bottom line is that by the time we retire our expenses are down between 20% and 40%. This is why expert opinions differ on how much of our pre-retirement income we need. Guidelines generally vary from 60% to 80%.
If you have a household income of $100,000 when you retire and you use the 80% income benchmark as your goal, you will need $80,000 a year to maintain your lifestyle. Assuming your 401 savings grow at 8%, you should expect to have up to $80,000 a year in interest income so you can avoid having to touch your principal as much as possible.
Think Twice Before Withdrawing Money From Your 401
The Coronavirus Aid, Relief and Economic Security Act expands the hardship withdrawal rules so that people can withdraw money from their 401 plans without paying the 10% early withdrawal penalty. It also gives you three years to pay back what you take out.
This might seem like a good idea especially if the COVID-19 pandemic has left you without a paycheck. But even if you meet the criteria for waiving the withdrawal penalty, it might not be the best option.
First, you have to treat the withdrawals like income, which means youll have a greater tax liability. Second, if you take money out of the account, youre forfeiting the money you might eventually earn when the market recovers. This is likely better left as a last resort, so think twice before you .
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Become Your Own Financial Guru
While youre in the active saving and investing stage before retirement, you might look to an expert to help guide you in the right direction. But the time will come when you glide into maintenance mode. From there, you can probably manage it on your own as long as you keep learning and stay in touch with whats happening in the financial world.
Its entirely possible to become a self-made financial expert. Read everything that you can, including good blogs. And start watching TV shows about finance. Soon youll know what disintermediation, econometrics and other terms mean without calling a financial planning expert, because youll be the expert.
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Put The Money In A Traditional Ira
401s have significant advantages over IRAs during your working years because it’s so easy to contribute to a 401 and because the resulting tax break is automatic. With an IRA, you can still get a tax break, but you have to claim it on your tax return as a deduction, which can be a bit of a hassle. But once you retire, the advantage shifts to the IRA. That’s because IRAs have access to pretty much the entire world of investment options, while 401s typically only have a few investments available to choose from.
What’s more, the investment options in your 401 can change at any time based on decisions made by your former employers, while the investments in your IRA are entirely in your control. All in all, rolling over your 401 balance into an IRA after retirement makes a lot of sense.
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What Should Investors Do While The Stock Market Is So Bumpy
Irwin: It’s a great time for investors to do a pulse check with their financial advisers. Make sure they continue to pay themselves first with retirement funding but feel comfortable with the market volatility. Stay the course when everything tends to be chaos around you.
Smith: It’s really hard to predict the stock market. I’d sit tight. But if you need money in the short run, you shouldn’t invest in the stock market.
Walsh: Take stock of where you are and focus on the long-term plan. When there are changes in the market or interest rate changes or inflation, that can cause people to make snap decisions.
Zutphen: Do not try to time the market. Be diversified between U.S. and non-U.S. companies. If you are not maxing out your elective deferrals and can afford to do so save and invest as much as you can. Your future self will thank you for doing so.
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Rmds Can Be Delayed For Some Workers
Putting off your retirement? If youre still working at age 72 and continuing contributions into a 401 or 403, youre entitled to an RMD reprieve as long as you dont own more than 5 percent of a company and your retirement plan lets you. If these conditions apply, you can delay the RMDs until April 1 after the year that you separate from service, at which point youll have to start taking withdrawals.
This is true as long as you work during any part of a year. So if youre 72 ½ years old and thinking about retiring by the end of the calendar year, reconsider if you dont want to make a withdrawal. If you keep working after Jan. 1 even if its just a day youll push off the date for taking that first RMD by one more year.
Keep in mind that the delay only counts for the 401 plan of the company youre still working for. If you have other 401 plans from previous jobs, youll need to take distributions from them if youre 72 or older.
Get Involved In The Political Scene
Do you have an activist bent? There’s no better time than retirement to take a greater interest in the issues affecting your city, your state, or the country in general. You could become a poll worker, volunteer on election campaigns, organize rallies, collect signatures on petitions, attend town hall meetings, or even run for local office.
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How Do You Withdraw Money From A 401 When You Retire
After retirement, one of the common questions that people ask is âhow do you withdraw money from a 401 when you retire?â. Find out the options you have.
As you plan your retirement, you should think about how you are going to live off your retirement savings once you are out of employment. You will need to figure out how to withdraw your retirement savings in your 401 post-retirement, and the best withdrawal strategies so that you donât exhaust your retirement savings.
When withdrawing your retirement savings from a 401, you can decide to take a lump-sum distribution, take a periodic distribution , buy an annuity, or rollover the retirement savings into an IRA.
Usually, once youâve attained 59 Â½, you can start withdrawing money from your 401 without paying a 10% penalty tax for early withdrawals. Still, if you decide to retire at 55, you can take a distribution without being subjected to the penalty. However, any distribution you take after retirement is taxed, and you must include the distribution as an income when filing your annual tax return.
Your 401 Savings And Where You Want To Retire
Where you plan on spending your retirement will have a major impact on how much money youll need to save in your 401. A number of different factors fall under this bucket, each with its own impact on your savings needs.
Cost of living is the most basic factor here. For example, retiring in Hawaii may seem like a tropical dream, but the cost of living in Hawaii is exceptionally high. If hitting the beach to surf in Oahu everyday is something you really want, youll have to make sure you have enough money in your 401 to cover the cost of living.
Big cities like New York and Los Angeles also have predictably high costs of living. However, more remote places like Montana and New Hampshire have much lower costs of living though, so youd need less in your coffers if you opt to settle in places like that.
Another location-based retirement savings factor to keep in mind is taxes. Each state has its own tax codes, and some dont have any income tax at all. Make sure you understand the tax policies of the state where you plan to retire so you have a sense of how much taxes will eat into your 401 savings over time.
For example, Texas does not charge any income taxes. That means when you withdraw funds from your 401 as a resident of Texas, you wont have any state taxes taken out. On the flip side, though, Texas has exceptionally high property taxes. So if you plan on buying a sprawling ranch in the Lone Star State, you property tax bill could be quite high.
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