Many people have a 401(k) they’ve been contributing to for years, but how can people age 55-plus maximize the benefits they get from these accounts? Area financial planning experts weigh in on some smart strategies — and the big mistakes they advise clients to avoid at all costs.
What is a key 401(k) tip for someone 55-plus?
If you’re working at age 55 or older and approaching retirement years, it’s a great planning idea to max out your contributions to a 401(k) whether or not your employer matches any part of it. Those last 10-15 years before retirement are hugely helpful in building a retirement fund, and most of us need all we can get to support our extended life expectations. The earnings and the contributions are tax-deferred until withdrawal.
—Paul Batson, Batson Accounting & Tax, P.A.
Make sure you aren’t carrying debt, other than low-interest debt like a house or car loan. If you are carrying high-interest debt, we recommend paying up to the full employer match and then using any extra funds to pay down the debt.”
—Rob DeHollander, Hollander Financial Group
Your 401(k) can be an essential source of income when you exit the workforce. But before you start withdrawing money from your 401(k), it’s a good idea to build a plan to create your retirement income through a combination of liquidity and guaranteed income.
—Brett G. Smith, Northwestern Mutual and Upstate Legacy Planning Group
Work with a Financial Advisor that you trust to help navigate the transition into retirement. There are many considerations; for example, when should the retiree turn their social security benefit on is an important one. This is not a one size fits all answer. Should the retiree “Rollover” the old 401K plan into an IRA is another. There are pros and cons to the “Rollover” decision.
—Mike Radecki, Merrill Lynch, Pierce, Fenner and Smith Inc.
What is the biggest mistake people make regarding their 401(k)?
One of the biggest mistakes people can make is to take early withdrawals from their 401(k), which can have a ripple effect that impacts their overarching retirement income plan. If you withdraw funds early, not only are you going to get hit with taxes and withdrawal penalties, but you’ll also miss out on the long-term benefit of compound growth. Because your money isn’t taxed as it grows in your 401(k), leaving your funds in your 401(k) allows them more time to grow and compound before you owe tax on them.
Making emotional decisions with their funds.
In some cases, 401(k) funds can be borrowed from the company plan. While it might be easy money to fund an immediate shortfall, it’s a bad idea for many reasons unless there is no other possible alternative. Even worse is the case where someone has borrowed from the 401(k) and is dismissed from employment before the loan is paid back. Taxes must be paid and a possible 10 percent penalty on the balances still owed.”
The biggest mistake people make is they sign up for a 401(k) and then never look at it again. It needs to be looked at regularly and the portfolio rebalanced on a regular basis. Target-date funds do this for you automatically.
When does it make sense to tap into your 401(k)? When should you avoid using it?
Income in retirement, and possibly a long-term care policy to reduce or help cover those expenses if they arise.
If you are charitably inclined and have other means to fund retirement, RMDs (required minimum distributions) at age 72 and beyond can be used to support charities with an ‘above the line’ deduction. That means each RMD dollar that is directed to a qualified 501(c)(3) will receive a dollar-for-dollar deduction—irrespective of your standard or itemized ‘below the line’ deductions.
It can be a good source of funds to borrow from, but there are risks that come with that. Folks sometimes use it for unexpected medical expenses. Some use it for college, but we caution that kids have other sources of money and a longer time horizon (to pay it off), so that’s something to consider.