You spent 30 years saving for your retirement, and the day finally arrives.
“You walk out the door with your plant and leftover retirement cake, and think ‘what’s next?’” said Jillian Russell, 401(k) education consultant for BOK Financial.
When it comes to managing that hard-earned nest egg, she suggests five options:
- Take a lump sum distribution. “You can take it all from the account, but if you do it could be a taxable event,” Russell said.
When people get close to retirement, or during times of economic uncertainty, they tend to panic and move all their money to cash. Russell said this is a mistake. “That doesn’t make sense for a long-term goal. You want your money to continue to grow."
- Roll it into an IRA/Roth IRA. That way, your money remains in a tax-advantaged account and it may give you more flexible investment options. But, Russell cautions, “You’ll be going from a group plan where an employer may share or pay all of the fees based on your own account balance.”
- Leave your money where it is. “As long as you retain a certain balance, you’re not going to get kicked out of the plan, but you can’t contribute to it,” Russell said. But your money could still grow and remains tax-deferred.
- Schedule distributions from the account. Distributions from your fund may come with a cost, Russell said. “For example, if you wanted to take $800 out per month to live on, there may be a distribution fee to do that.”
- Move your account to an annuity. “An annuity is an insurance product sold by a life insurance company and it is guaranteed income for the rest of your life. You can’t outlive it,” Russell said. The downside is understanding the complexity of annuities.
If you’re still wanting to grow your money substantially in retirement, it might not be the best option, she said.
Russell said recent retirees could apply the 4% Rule to their withdrawal strategy.
The idea is that if you average 4% returns every year; you’re living on your interest and dividends, not your principle.
But, if you need to dip into the money or the market underperforms in the first few years, the 4% won’t work as well.
Don’t wing it
Russell said too many people enter retirement without a plan. “This isn’t the time to wing it,” she said. “Start a few years before you’d like to retire and make a distribution plan.”
And take into account where and how your retirement will be spent as each state has different tax structures and living expenses.
Tips to stretch your money in retirement
- Have debt paid off before retirement (credit cards, home, etc.). Retirement money goes a lot further when you’re not writing monthly mortgage checks.
- Stay invested. You trusted the investment process for a 30-year career. Trust it for a 30-year retirement.
- Stay committed to your strategy. Have a clear idea of what retirement looks like for you, what your long-term goals are and make sure you have a strategy that aligns with that.
- Review your account annually.
She suggests talking to a tax professional and an investment advisor about priorities and plans, to determine what options work best for you. She added, “And remember: small, steady steps win the race when it comes to retirement.”