Does a significant portion of your retirement assets exist within your 401(k) plan? If so, you’re not alone. Many workers use their 401(k) as their primary retirement-saving vehicle for a number of reasons. You get tax-deferred growth inside a 401(k) plan. You also may get matching contributions from your employer. Those two components can make a 401(k) a powerful accumulation vehicle.
Retirement isn’t only about asset accumulation, though. You certainly need to save a substantial amount of money to fund a long retirement. However, you also need to make that money last. Your retirement could last several decades. If you aren’t disciplined with your spending and money management, your 401(k) funds may not last the long haul.
Below are a few tips to help you develop a 401(k) plan that’s built to last. If you are approaching retirement and haven’t considered your distribution and spending strategy, now may be the time to do so. Without a plan in place, your assets may not last through the later years of retirement.
Calculate a sustainable withdrawal amount.
One of the most effective ways to preserve your 401(k) assets is to limit the amount you withdraw each year in retirement. When you first retire, you may have more money and free time than you’ve ever had in your life. It could be tempting to spend money on travel, shopping, dining out, hobbies and other costly activities.
Instead of taking money as you need it, calculate a conservative withdrawal rate and stick to that amount. Ideally, you want to withdraw enough to meet your needs but also leave as much in the plan as possible. The more money you leave in the plan, the greater your ability to continue to grow your assets. A financial professional can help calculate the most appropriate withdrawal rate for you.
Don’t forget about taxes.
Remember that distributions from a 401(k) plan are taxable. That means you should account for those taxes in your budgeting and your distribution planning. It may be helpful to analyze all your accounts and income, and then map out the order of distributions that’s most tax-efficient.
For instance, you may have assets across 401(k) plans, IRAs, Roth IRAs and even fully taxable accounts. You also may have income from Social Security, pensions and other sources. Work with your financial professional to project the tax consequences of utilizing those sources for retirement income. You may find that it’s more tax-efficient to delay 401(k) distributions in favor of taking income from other accounts.
Look for guaranteed income opportunities.
One of the biggest challenges retirees face is the prospect of a retirement that lasts 30 years or more. It’s possible that you may spend more time in retirement than you spent saving for retirement. If your assets and income don’t last through retirement, you could face challenging circumstances in your later years.
One way to minimize the financial risk of longevity is with income that’s guaranteed to last through your lifetime. For example, Social Security and pensions often provide lifetime guaranteed income. Annuities can be another useful guaranteed income source. You might consider using some of your 401(k) assets to fund an annuity that provides income that’s guaranteed regardless of market performance.
Ready to develop your 401(k) strategy? Let’s talk about it. Contact us at Gregory Financial Group. We can help you analyze your needs and develop a plan. Let’s connect soon and start the conversation.
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