Retirement, ready or not…? So you may be months, weeks, or days from retiring. You already have your plans set and the dream is on track. Or is it? Did you save enough and have you looked at your estate plan at your necessary changes? So you have a large 401k - is it invested properly? Oh – here’s a favorite question more and more of us will be asking in the coming years: is the government going to be the silent partner in your retirement? Too many people make the mistake of not properly addressing their 401k once they retire, yet it will be one of, if not the largest provider of the future retiree’s income. There are many issues that can easily be overlooked on the subject of retirees and their 401ks. If you regularly read this column you know I am not a big fan of taxes. You have heard me speak about what the government can do in relation to your retirement assets. We have also looked at mutual funds inside of 401k plans. Today’s column will look at a few things retirees need to address that are often overlooked. The first involves looking at what kind of access one has to their 401k options. Some companies may have structured payouts from the plan. This can be a good attribute in providing a regular cash flow. However, a retiree needs to look at how he or she will get the funds; i.e. are they electronically deposited, or is a check sent to the home? What is the company policy if the check gets lost in the mail? Will the plan allow additional withdrawals that may not be scheduled? One other important factor to check is the processing for these requests. In a financial emergency, having quick access to your funds will be very important. Aside from getting access to your funds, a retiree will often move everything to a very conservative investment. Effectively, this is like driving while applying the brakes, which could result in your money losing buying power for your later years of retirement. We are taught to have a large bond component in a retiree’s portfolio. However, this traditional thought may need to be examined. The overall mix of stocks to bonds does need to questioned. As medical technology gets better and we live longer, a portfolio will need to have a larger allocation to stocks to maintain purchasing power over time. The United States is close to a point where the demographics could dramatically change the way our economy works. As a result, traditional allocation models may fail. A third talking point involves the investment options within a 401k plan. Typically, a plan may have 3-25 investment choices. Many of these choices are weighted towards asset appreciation, i.e. growth and international funds. As a retiree needs to start drawing income from the plan, there is a high probability the investment selections may not be able to provide adequate income. Even the investment options designed to provide income, typically bond and money market funds, may have a hard time providing it consistently. This is common of mutual funds because the price of the fund and underlying securities are always changing. When looking at the information in the previous paragraph, think about how dynamic your life is. Chances are it is more diverse because of the assets you have accumulated, and your family may now include grandchildren or great-grandchildren. This translates to more complexity. Looking at 401ks, they are designed to help people accumulate monies, not distribute them. Think once again about the choices you have in your 401k. Can you really build a portfolio dynamic enough to help make your retirement dreams come true? For most of us, 3-25 funds will not make an adequate selection to execute our plan.
One of the last ignored issues involves estate planning issues of your 401k. If you plan on passing the assets to your spouse, the plan may have flexible benefits for the beneficiary. However, if you plan on passing the assets to a non-spouse beneficiary, the employer will often have a specific time frame in which to distribute the assets. The consequence of this is the fact that money may be taken out more quickly than the beneficiary may require, resulting in higher taxes being paid. The final challenge to address is tax diversification. Having a large percentage of your assets tied up in the 401k was great in terms of accumulation – but can create extreme inflexibility in terms of taxation at distribution. In other words, we know exactly what the tax rate is today, but are foolish if we assume it will remain unchanged forever. Far too often the plan is to let assets grow tax-deferred as long as we can, but future tax implications have to be managed along the way. I couldn’t more strongly encourage you to consider ways that you can pay a little today to at least create some flexibility tomorrow, should taxes be much higher later.
As you can see, there are several aspects of your 401k that you will need to consider for retirement. The 401K is a wonderful tool for accumulating assets, but when it comes to retirement, many of the previously reviewed issues have better or more flexible options when the money is rolled over to an IRA. But don’t jump at the opportunity for a 401K rollover. Many costly mistakes can occur during an IRA rollover from a 401K that could result in needless fees and tax consequences. In some cases, depending on the age of the retiree, it may even make more sense to keep your money in the 401K for a few years before doing the rollover. As we have mentioned several times, you need to have a strategy. When all is said and done, you need to make sure you can have access to your assets in the most cost-effective and tax-efficient scenario possible. The 401K is great, the IRA could be better, or it could even be worse. Be sure to contact a member of our team or another financial professional before making a decision that you could possibly regret. Remember, you only have one shot at retirement! Are you ready? _____________________________________________________________________ Joseph “Big Joe” Clark is a Certified Financial Planner and the Managing Partner of the Financial Enhancement Group, LLC. He is a Registered Principal offering Securities through World Equity Group, Inc, member FINRA/SIPC. Registered Investment Advisor Services offered through World Equity Group, Inc. Big Joe can be reached at bigjoe@yourlifeafterwork.com, or (765)640-1524.