What to Know About Your 401(k) Before Retiring

Thomas ZuttermeisterPosted by Thomas Zuttermeister on October 9, 2019

There’s no getting around the fact that the landscape of retirement plans has changed dramatically during the past decade or so. 401(k)s are no exception, and many of these have undergone subtle changes that could go unnoticed by the holder, such as smarter mixing of stock/bond options, automatic contribution percentage boosts, and more. It’s all set in place to help you retire smarter, but the downside to this is that many people allow their retirement plans to go on autopilot rather than taking a closer look at the details. 

If you’re nearing or planning for retirement, you owe it to yourself to gain a better understanding of your 401(k) and how it works—here’s what you need to know. 

1. Review Your Investments

It’s not at all uncommon to set up a 401(k) plan and make a number of initial investments, only to forget about where this money is actually being allocated years later. When this happens, there’s a strong likelihood that a portfolio will be stock-heavy, which isn’t always the best choice for those nearing retirement age. Rather, it’s best to ensure that investments are varied and less likely to encounter risk, which can cause significant and immediate harm to a portfolio. Consider looking into target-date funds if you don’t know where to start, which is a widely available, yet often overlooked option for 401(k) plan participants. 

2. Get the Matching You Deserve

Few people will argue against taking free money, but what about those who don’t take full advantage of their employer’s 401(k) matching program? Many people choose auto-enrollment as an option to avoid dealing with the process of tweaking their 401(k) plans, but this typically means getting less in terms of matched funds than what is possible. While details will come down to your specific plan, you may need to invest up to 6 percent of your pay in retirement savings to take full advantage of employer matching. 

3. Don’t Cash Out

The biggest mistake you can make when it comes to preparing your 401(k) for retirement is cashing out early. For one thing, any money that is stored in a 401(k) will be fully protected by creditors—a protection that disappears once the money is taken out of the account. Even more important to consider, however, are the penalties associated with early withdrawal. Most plans allow you to make penalty-free withdrawals between ages of 55 and 59½, but in order to do so, you have to retire after reaching 55 and keep the money in the plan. It may seem like a great time to pay off an old debt, but this simply is not what your 401(k) is for. 

4. Complement Your 401(k) with an IRA

For those who have interest in having access to assets without having to dip into their 401(k), using an IRA as a complement can be very effective. This is especially true if the plan itself doesn’t contain any good fixed-income options, in which case allocating outside of the plan (to an IRA) may be a better idea than keeping all of your money bundled into a single account. Additionally, it’s often possible to convert a 401(k) to an IRA once you’ve reached the age of 59½ or even 55 if you’ve already left a job. Either way, your 401(k) doesn’t need to be the only investment in your retirement toolkit. 

 

The best way to learn more about how to get the most out of your 401(k) plan is to work with a financial advisor who can lay out of all the options for you and help clarify how to best move forward. After all, it’s all about making the plan work for you—not the other way around.