If you’re like many retirees, your 401(k) may be your single biggest retirement asset. The 401(k) plan can make for an excellent retirement savings vehicle. It offers tax-deferred growth while funds are in the account, allowing your earnings to compound quickly. Also, if your employer has a generous match, you may get the benefit of additional contributions into the plan.
As you near retirement, though, you’ll have to start thinking about your 401(k) not as an accumulation vehicle, but rather as a distribution tool. You will likely have income from Social Security and possibly even a pension in retirement, but you may also need income from your savings to fill in the gaps.
Many retirees worry about drawing down their assets too early, thus having little income for the later years of retirement. A sound distribution plan can help minimize that risk. When you have a distribution strategy in place, you can make sure that you don’t withdraw too much money and that your funds can last through your lifetime.
If retirement is approaching quickly and you don’t have a distribution strategy, now may be the time to create one. Below are a few questions to ask yourself to help you kick-start your planning:
How much income do you need?
This question is really at the heart of any distribution plan. You know you need income, but you may not be sure how much. Take too much income, and you could drain your assets too early. Take too little, and you may not be able to support your desired lifestyle.
One way to answer this question is to build a projected retirement budget. Categorize and estimate your expenses in retirement. Also, project your income from Social Security, pensions and other sources. Do your expenses exceed your estimated income? If so, that gap is the amount you will need from your savings.
If the income need seems high, you’ll have to adjust your budget, save more money or possibly work in retirement to generate additional income. Also, remember that inflation will likely drive up costs throughout your retirement, so your income need could increase every year.
How much risk should you take?
The balance between risk and return is tricky for every investor. However, it’s especially challenging for retirees. You need growth to sustain your assets and your income throughout your retirement. However, too much risk could cause losses that corrode your savings.
Also, keep in mind that many 401(k) plans are designed for saving and accumulation. Thus, their investment options are geared for that purpose. You may find that you can build an allocation that’s more in line with your risk tolerance by rolling your 401(k) funds into an IRA after you retire. Many IRAs offer a wide range of investment options, allowing for more flexibility and precision with your investment strategy.
How much of your income is guaranteed*?
Guaranteed income can reduce a lot of the anxiety and stress you may be feeling about retirement. Social Security is guaranteed, and many pensions are as well. Your distributions from your investments, though, may not be guaranteed.
You can change this by using tools such as annuities. They offer a variety of ways in which you can create a stream of income that’s guaranteed for life, regardless of investment performance or how long you live. While annuities with guaranteed income usually aren’t available in a 401(k), they are often available in an IRA. You may want to explore these guaranteed* income options.
Ready to develop your distribution strategy? Let’s talk about it. Contact us today at Bam Advisory Group. We can help you analyze your needs and develop a plan. Let’s connect soon.
*Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values.
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