Having a 401k or IRA is great, but do you know how to turn it into income when you retire?

“Would you get a divorce and leave your money with your ex to manage? If you answered “No!” then you might want to think twice about leaving your 401k with your employer.”- Jack Branch

Due to its’ inherently volatile nature, the stock market will always experience ups and downs. Unfortunately, boom and bust cycles and other erosive factors such as inflation adversely impact Americans’ savings. Those within 5-7 years of retirement who have employer-sponsored plans should create a blueprint for how best to spend down the money in those plans.

The days when workers could rely on predictable income generated by a defined benefit pension are far behind us. Instead, Americans often depend on employer-sponsored “defined contribution” plans such as 401Ks or IRAs.

Such benefits may be double-edged swords. For example, participants in a defined contribution plan could have a little more control because they make their own investment decisions instead of a pension manager. That may seem reasonable until you ask the question, “How many of us have the time, temperament, training, and tools to make the best money decisions?” Employer plans are often criticized for shifting the responsibility of retirement planning to those least skilled and trained to make the best wealth decisions.

For those still in the accumulation phase of life, employer plans offer some tangible benefits, such as tax advantages, protection from certain creditors, and the ability to take vested retirement funds with you when you leave. Your company may also offer matching funds. If you are still years from retirement, it could make sense to contribute to a company plan, at least to the point where you get matching funds.

However, there is a downside to investing in qualified workplace plans. Among the cons is the potential for high fees to eat into your earnings. As a plan participant, you have little to no control over these administrative costs. Over the years, such costs tend to chip away at your savings.

Another disadvantage of putting all your savings into a 401k or IRA is that if you need to make a withdrawal before age 59½, you will typically be penalized 10%.

So, how do you turn your 401k into retirement income?

If the recent pandemic did nothing else, it made many Americans realize that income is king, especially when you are no longer getting a paycheck. Generally, 401k plans are not created to provide participants with lifetime income streams but were instead built for saving. For this reason, if you are within a few years of retiring and own a qualified plan, you should seek out a retirement income specialist. Unlike most financial advisors trained mainly to help their clients gather money, retirement income specialists have specialized knowledge in the “decumulation” phase of a person’s economic life. Retirement income experts can recommend products that enhance the safety of your portfolio and ensure you won’t run out of money before you die.

Should you roll your 401k into an IRA?

If you are at or near retirement, you’ll need to make many decisions once you stop working. One of the most critical is what to do with the money in your company-sponsored 401k plan. In most instances, a person can either keep their 401k plan with their former employer or decide to roll it into an IRA. Your advisor may believe that a rollover makes sense for you, depending on your unique situation.

IRAs offer several advantages over 401Ks, including lower fees, penalty-free withdrawals, more investment choices, and the possibility of consolidating multiple 401ks into one account.

However, there are reasons some people may not want to do a rollover. For instance, IRAs do not enjoy the same level of creditor protection as do 401ks. IRAs, unlike 401ks, do not offer loans. Also, with an IRA you must wait until age 59 ½ to take your money out penalty-free, while 401ks allow penalty-free withdrawals starting at age 55.

Another possibility is to roll over your IRA, 401k, or lump sum pension into a deferred or immediate annuity, creating an “IRA annuity.” An annuity of this type allows you to put your funds tax-free directly into a qualified annuity product. Doing this type of rollover can be tricky, and you’ll want to find a rollover specialist to assist you.

Bottom line: If you have money in an employer-sponsored plan and are within 5-10 years of retirement, it’s time to meet with a qualified retirement income specialist. Your advisor can take a snapshot of your current situation and make recommendations according to your risk tolerance, goals, and other considerations.