When you decide to retire, you have a few different options for your 401(k). You could leave the money in the plan, transfer it to an IRA or convert it to an annuity, withdraw it as a lump sum, or take required minimum distributions (RMDs) starting at age 73.
There are good reasons for all of these, but in this article, we’re going to talk about why you might want to keep that money in a 401(k) if you’re retiring.
Your first years in retirement and Your 401(k)
You may have spent decades preparing to retire, but until you actually do, it’s hard to know exactly what it will look like. Maybe you want to travel more than you thought you would, or you decide to start a side gig. Maybe a child moves to a different state, and you choose to move, too. Whatever happens when you retire, you’ll need time to settle into a true routine and see what your monthly spending actually looks like.
During those years, it can be a smart idea to keep about 2-3 years’ worth of living expenses in the 401(k). Some plans offer a stable value fund or a safe asset that pays a higher interest rate than a money market fund. (Note: This has shifted a bit since interest rates have gone up. However, rates are expected to decrease at some point. Keep an eye on rates to determine the best option for you.)
This helps to protect your money in case of a recession, correction or other economic impacts, while allowing that money to grow in your account. Then, you can withdraw what you need each month from the 401(k), and withhold enough for taxes.
What to do with the money in your 401(k)
So, if you’re leaving a few years’ worth of expenses in your 401(k), what should you do with the rest?
One option that can maximize your money is to roll the rest into an IRA. While you’re living off the income from your 401(k) for a few years, your IRA can continue to grow. We can then rebalance that growth to fill up the next few years of living expenses.
The bottom line
Your 401(k) can be a useful tool for growing your money even after you retire. The best thing you can do is to plan ahead for what you’re going to do with that money, and to know what your options are. Things can change, but if you’ve got an idea of how you’re going to handle your 401(k) after you retire, then you’re much likelier to maximize returns on that account.
Do you need help planning for your financial future? Contact me today to set up a meeting to talk about your goals.