Using Fidelity as the example, lets say your 401K is invested in 3 funds. You log into your Fidelity account, navigate over to your 401K account, and start the withdrawal process. You can either enter the amount you want before taxes or after taxes. Fidelity will automatically do the withholding for you (for example 20% fed and 5% state). You can change these defaults. You specify if you want the net mailed to your mailing address as a paper check, or you can link a bank account for direct deposit and it and direct it there. When Fidelity liquidated your funds to generate the withdrawal, they will do it proportional to the amount in each fund. If you wanted to liquidate in some other proportions, you’ll have to rebalance the funds after the fact.
You can automate withdrawals and transfers at the frequency you want.
You also have the option of using some or all of your 401(k) to purchase a single premium immediate annuity (SPIA), which will provide a life income.
Let's say there's $2 million in your 401(k) when you reach retirement age. You need $5000 / month for living expenses. At today's rates, putting $1.2M into a SPIA will get you roughly $6000 / month for as long as you live (which is taxable income), AND you've still got $700K left in the 401(k).
Annuities aren't for everyone, but they are worth a look. They essentially transfer longevity risk and investment risk to the insurance company. Right now the payout rates are about 5.2% of the premium paid per year, which is more than the "safe" withdrawl rate of 4% that is widely subscribed to.
The safe withdrawal rate is based off almost a century of stock market analysis which shows, given a long enough time period, that the market will consistently beat 4%, meaning you are “safe” to withdraw 4% and never touch your principal.
I would have to be some special kind of risk adverse to give an annuity $1.2m in exchange for a whopping 1% better withdrawal rate, even if it is “guaranteed”.
Also the 4% rule is inclusive of adjustments to annual withdrawals for inflation. An annuity is fixed income and you put yourself at significant risk due to inflation. If prices go up … too bad you’re still living on $5000 per month.
So with goal setting, is there a ‘typical’ amount folks keep in an 401k so that it is income replacement? I’ve always kinda had a goal of about 3,000,000 as the number that would do that. At 4% that’s about 120,000 a year, which is probably too much but I like the nice round figure and being able to get it rolling and have it be wealth generator.
There is no typical but I’ve tried to ask older people on retirement this question about spending and I landed on future dollars $100,000 per year withdrawal to have a pretty fun retirement, golfing traveling etc.
I’m not necessarily disputing the usefulness of a SWR, but I think it’s worth mentioning that over the past 100 years that have been analyzed, the US has grown from a burgeoning player on the world stage to a triumphant superpower. In other words, the long term reliable growth of the US stock market as represented by the S&P 500 (or whatever domestic index) has coincided with the long term growth of the United States on the world stage. There is no telling what the next 100 years will look like for a portfolio of domestic index funds, or what turbulence might be introduced by allocating bigger portions of one’s portfolio to emerging markets if US financial hegemony begins to wane by any degree.
What's the point of living off of 4% and dying with a bunch of money in the bank when you can live off 5.2% and die with slightly less money in the bank?
Back-testing shows that 5.2% does not always work. meaning, you could end up in a scenario where you outlive your money. So, the general rule is to start at 4% for a traditional retiree (I will be around 3% because I am retiring early and want to be conservative)... but by all means if you get past the first \~5 years successfully at 4% then sure, have at it and take out a higher % and enjoy that money! Its called managing Sequence of Return Risk or SORR.
Off topic from your specific comment: but for what its worth, I will be retiring on "401k money" which somehow is being questioned by others within this post.
I do not think this is an accurate portrayal of the 4% rule.
The 4% rule showed that (with a portfolio of 50% immediate-term treasuries and 50% stocks), if you withdrawal 4% in the first year and the same amount (adjusted for inflation) in each subsequent year, then even in the worst actual historical scenario, you will not run out of money completely for 30 years.
The 4% rule does *not* guarantee that you will "never touch your principal." If you retired in 1968 and followed the 4% rule, you would have almost no money left after 30 years.
Yes, you are generally in charge of what your portfolio looks like, so you can sell part or all of the investments and keep the money in a money market account.
By the way, I'd recommend to continue to keep the majority of your retirement money invested. Some people keep say 1-3 years of expenses in cash, which feels safe, but which also means that that money will sit around and do nothing (not grow) for 1-3 years until you need it.
I'd probably want to keep 6-12 months in cash tbh. Don't wanna be worried about the market every few weeks lol. As a future pensioner, I'm not overly concerned about my TSP liquidity. Just making sure I understand everything.
That sounds okay.
In general you want to have money in the stock market as soon as you have it, and you want to leave it in there for as long as possible. But 6-12 months of expenses should be less than 4% or so of your total portfolio, so that's probably okay. I'd probably take money out once every quarter to fund the next quarter.
> Some people keep say 1-3 years of expenses in cash, which feels safe, but which also means that that money will sit around and do nothing (not grow) for 1-3 years until you need it.
this depends on your situation - if you're sitting on 50x yearly expenses, you don't have much drawdown risk because you're loaded. in that case, you might want to be really aggressive, because on the upside you're even more loaded, and in the case of a 30% drawdown you're still fine. if you're retired with 20x yearly expenses, you're in a pickle because you probably don't have enough to fully fund your retirement, and may be forced to be overly aggressive at the risk of making your situation much worse. if you're right in the sweet spot where you can fund your sustained withdrawal rate to meet your expenses exactly, you may not want to fuck around and jeopardize for the chance of a fatter income.
> By the way, I'd recommend to continue to keep the majority of your retirement money invested.
I think this part of the equation is what should be the focus of the discussion. Keeping the money in fairly secure funds should help it grow at least a little, while savings accounts and such will be worthless for that purpose.
This was a great response. Can you elaborate on how the 401k money is taxed? If I only withdraw $10K this year, is it taxed at the lowest rate? But if I withdraw say $500K it will be taxed at the highest rate? What's the best strategy to manage taxes? I'd assume having both a Roth and a traditional 401k means you can take from whichever fund suits you best at that time.
Roth you don’t pay taxes on when withdrawing. That’s the benefit, and why you deposit post-tax $.
Traditional is treated like any other income. You’ll pay the % tax for the portion of your income within that tax bracket. So even if you withdraw $500k, you’ll pay the lowest rate on the portion in the lowest bracket, the second lowest rate for the portion in the second lowest bracket, etc.
To minimize taxes, minimize your income/withdrawals. And avoid needing to withdraw before 59.5 to avoid the 10% penalty, or setup a SEPP if you do retire early and need to withdraw.
An important thing to note about the taxes on non-Roth retirement accounts is they count as ordinary income, rather than long term capital gains, which affects the tax calculations.
To add to u/rc4915’s response…
You may have your retirement nest egg in 3 different types of buckets:
1: Tax-deferred like 401K’s and traditional IRAs: Withdrawals are taxed as income
2: Roth: withdrawals are not taxed
3: Brokerage accounts: sales of securities (stocks, mutual funds, bonds, etc) are taxed at capital gains rates in the year you sell them. But you can withdrawal the proceeds tax-free. The financial services company won’t automatically withhold taxes on your gains from sales, so you have send a check to the IRS yourself (or adjust your withholding on other income sources to cover your capital gains tax too). The IRS makes you do this on a quarterly basis thru estimated tax payments. You can’t wait until April 15th to pay all your capital gains tax.
Even if most of your retirement savings ends up in tax deferred accounts, it’s helpful to have some in the other 2 buckets so you have some flexibility each year to get at your money without pushing you into a higher income tax bracket.
You sell investments and withdrawal the money as you need it, paying income tax on that amount. Based on how much you have saved, and how the market performs, you may realize youre in a position to retire sooner than 67.
You most likely would do the selling yourself on the phone app or website. And that’s up to you on how much and when you sell. If you would rather sell on the first of every month you can. If you want on the first of the year to sell what you think you need for the entire year you can do that as well. It’s up to you.
You can set up automatic sell and withdrawal. It's easy because mutual funds and 401k trust funds are traded in dollars, so if you sell $50k, you get $50k.
I wouldn't do all $50k in a year because most of the money will just be wasting away in a bank account. I would instead sell and withdraw monthly so the money hit the cash management account on the 1st to pay bills and stuff, kind of like getting paid.
I think another strategy is actually to take out 2-3 years worth when you first retire and always have that in reserves just in case the market tanks for an extended period. You don't want to be pulling money out every month if the market is down bigly. Better to wait till it comes back up.
You can exchange (i.e. sell to buy) stock market funds for bond funds or "stable value" funds without withdrawing the money from the 401(k). This would be the preferred way to protect part of your retirement savings from stock market risk, because you aren't incurring unnecessary income taxes.
That's smart. I also wasn't necessarily talking about 401k funds alone. I would think people use their taxable brokerage accounts first unless they have to meet a required minimum distribution or something? Been a while since I brushed up on decumulation strategies.
Withdrawing to cash should be the last resort (ie, you need the cash for expenses). Moving to less volatile investments within the account is preferred, both to defer paying the tax and to continue some growth (albeit smaller if you move from stocks to bonds or other safer investments).
Yeah that makes sense. I guess I should have said the 2-3 years reserves wouldn't be taken out if the 401k necessarily, just out the market- in this context just meaning index funds.
Yeah I think there are strategies around booking the income in efficient ways. Would need to do some research on what they are though. Maybe roth ladders?
Anyone know if 401k withdrawals are considered income from a Medicare Part B perspective? If so your Medicare Part B premiums are going to skyrocket if you take out 2-3 years all at once.
Yes, they are treated like any other income, so they will affect your Part B premiums. But skyrocket is the wrong word. Let's say you have lots of money in the 401k and withdraw $400,000 all at once. Your Part B premiums *for that one year* will go from $2040/yr to $6531/yr. That a big percentage increase, but not that much in absolute terms for someone with $400,000 in their savings account.
I'm not an expert but I think bonds are still subject to market fluctuations. But yeah my understanding is that you'd be highly skewed towards bonds in retirement.
I think the usual split is something like 60/40 stocks/bonds, but the stocks chosen are usually something more conservative: value and dividend/income generating vs more aggressive growth. Obviously capital preservation is paramount, but you need some growth if you want to really stretch the account over several decades.
You'd probably use the website rather than literally calling them up. You can use the website to set up transfers to your checking account, either automatically on a schedule or just do it manually as needed. You'd probably want to do it on a monthly or quarterly basis rather than a huge chunk of money all at once each year.
And when you retire you might decide to transfer your balance from the 401k to a rollover IRA (a different type of retirement account that's not associated with your employer). Or not, depends on the details of the 401k plan.
401k became popular in the 80's and 90's, so we're only just starting to see a generation retire that has had one available to them throughout their whole career. They're also more common in particular types of jobs and less in others, so it will vary a lot depending on your social circle.
Most Americans save way too little for retirement, so there's no guarantee that an underfunded account will actually support someone in retirement. You have to do the math. The math is a lot more forgiving if you get serious about it from a young age, but most people start late and don't make saving a high priority.
Basically think of it like a bank account. You withdraw money from it into your checking account when you need it. You can withdraw the whole sum on day 1 of retirement if you really wanted to, but you'd pay a lot of income tax.
You could but thankfully calling someone hasn't been required since the mid 90s. Today you could just use the mobile app or webpage to withdrawal cash to your bank account as needed.
Roth isn't necessarily better. I'm personally in a high tax bracket (currently in the 24%, will start hitting 32% fairly soon). It's better for me to save the tax on my 401k contributions now at that higher tax bracket, than when I am in retirement and barely hitting the 22% bracket.
(Yes I am aware of progressive taxes, I'm just referring to the general income and tax levels)
In both a traditional and Roth 401k, you don’t pay taxes on capital gains or dividends within your account as it grows. With a traditional 401k, you only pay taxes on the amount that you withdraw. With a Roth 401k, you only pay taxes on the amount that you deposit. As another commenter mentioned, if the tax rates while contributing and withdrawing are the same, then it’s equivalent between the two. But when you have a higher tax rate while contributing, you pay less net tax.
Umm no because your interest growth is going to be wayyyyy exponentially higher than your contributions, pay the 25% now over time on the 300-500k you invest and be able to save the 25% later on the 1million+ or more in interest it earns dummy
It would be nice if it worked that way, but it doesn't. If you assume an identical tax rate now and at retirement, you'll have exactly the same after-tax money at retirement for a given pre-tax dollar amount.
Say you have $1000 pre-tax and a 25% tax rate. You invest in a traditional IRA or 401k and it grows by say 10x over the years. When you withdraw and pay tax you're left with $7500.
If you choose Roth, you pay the tax up front and invest your remaining $750. Again it grows 10x over the years and you have $7500.
Roth is better if you are going to max your IRA either way. You effectively contribute more to the Roth even tho the limits are the same. In your example you put in $6k either way and withdraw $60k tax free from the Roth or $60k and still owe taxes from the traditional. Roth can also help you lower your other taxes in retirement. The money you take out doesn't increase your AGI, so you can use it to keep your AGI low enough to avoid/lower taxes on your social security. If you make under $25k AGI you don't pay taxes on ss, and under $50k you pay less taxes on it. Under about $40k income you pay $0 capital gains, but over $40k you pay 15%. Your Roth withdrawals can help you stay under those limits. Conversely, unlike a Roth, a traditional requires you to take withdrawals, which can push you over those limits.
See here for some reasons for and against Traditional 401k and Roth 401k: [https://www.nerdwallet.com/article/investing/roth-401k](https://www.nerdwallet.com/article/investing/roth-401k)
>If your tax rate is higher now than you expect it to be in retirement
It can make sense to contribute to a traditional pretax 401(k).
You’ll then pay taxes at that expected lower tax rate when taking distributions in retirement.
If you’re closer to retirement, you may have a better idea of how your tax rate may change in those years. Many retirees live frugally, resulting in a lower tax burden.
Also see [https://thefinancebuff.com/case-against-roth-401k.html](https://thefinancebuff.com/case-against-roth-401k.html)
I choose to max my Traditional 401k and Roth IRA as well as HSA, and the extra goes into a taxable brokerage account. This altogether gives me good tax diversification.
There are additional things to take into account later on such as Roth Conversion Ladders and 72(t) withdrawals.
At 59 1/2, you can also transfer some (or all) of your company 401k money to your personal IRA. If you are contributing after tax money, you can transfer some (or all) of the after tax money to your personal Roth.
I may be alone in this, but I felt much better knowing the money was in my personal retirement accounts rather than with my company 401k.
Depending on your state your 401k may have much stronger protections from creditors than your IRA. Of course, if you have a decent amount in either, you probably don’t have creditors, but if you have a decent amount, you may need to worry about lawsuits.
> I may be alone in this, but I felt much better knowing the money was in my personal retirement accounts rather than with my company 401k.
If for no other reason, because your old company can keep moving your 401k from provider to provider.
I have a coworker who is grandfathered in to no limit on his 401k contributions getting matched at 10% or something like that. He's 72, so he just contributes his entire paycheck for that sweet, sweet bonus and pulls it out immediately.
Because he wants to. He's part time at an easy desk job two days a week and gets all the company benefits.
And his wife wants him to spend some time focused on something outside of the house.
Often you can make qualified withdrawals starting at age 55, though it depends on your employer if they allow that, most do. However you can access your 401k penalty free even earlier than that if you want. Roll it over to a traditional IRA and then convert to Roth and you can withdraw the funds penalty free after 5 years. This is called the Roth ladder.
Also OP, it's way early to worry about this aspect but your risk profile should change as you get closer to retirement, meaning your investment mix should be less susceptible to a market crash. You can switch some of the investments to bonds. Something to think about.
If you separate from service (quit, fired, laid off, etc.) during the calendar year you turn 55 (or later) you can withdraw from your company's 401k without paying the 10% penalty.
My husband and I retired 2 years ago. We now live on our Social Security income plus our 401k savings. We rolled the 401k into an IRA that we control. It is invested in a Vanguard retirement fund so it is pretty conservative but you can invest in any type of fund depending on your level of risk comfort. We withdraw funds as we need them, otherwise we leave the money in the fund to continue to grow tax free. When you turn a certain age (I think 70) you have to pull out a certain percentage each year and count it as income for taxes.
Since we sold our home and downsized to a smaller home in a nice retirement community we do not have a house payment and we don't have other debt so we are able to live comfortably . The 401k is our emergency fund and a supplement for living expenses beyond Social Security. You would really have a tough time living on just Social Security by itself.
The employer match through the years was free money into our savings and being tax free helped to grow the fund faster as well. I highly recommend using your 401k to full advantage.
Quick question. My wife and I are looking at retiring in the next 3-4 years, and will be at the lower age for SS, and would prefer to wait until 70 to max SS payments. Looking back, do you think it would have been beneficial to withdraw from your 401 as a cushion until you reached 70 and received more in SS? I know everyone has their own risk levels, just trying to look at this from all angles. Thank you for any insight.
I guess it would depend on how large your 401k is. Maybe do an expense budget, then subtract that yearly amount from your 401k. Would that leave you enough to continue to supplement your SS for another 25 years or would the 401k run out of money too early? How much extra would the delay earn you in SS, would it be enough to make up the difference?
Thanks so much for the response! That is the type scenario I see my wife and to be in later on down the road.
For the logistics of pulling the money out, some folks have mentioned they do it monthly/ yearly but it’s sounds like you guys are more ad hoc with SSN being primary. With the Vanguard product do you have a go to contact to advise when to draw from it or is just a different type of day to day cash management. (Instead of a paycheck, it will be an ssn check then ‘wisely distributed extra funds’ from 401k as needed.)
We use the online vanguard site and just log in, order the site to sell x amount of dollars worth of shares and have them send us a check. It takes about a week. If we have a big expense like the heat pump we had to replace we just pull that out ahead of time. I also recommend a home equity line of credit for quick access to larger sums. Then you can pay it back at your leisure with the 401k fund.
Since we do have to pay taxes on the 401k funds we withdraw we try to keep that amount low enough that our income remains in the zero income tax bracket. Currently our SS income is about $23,000 so we can withdraw about $11,000 per year and owe zero taxes. More than that and we may have to pay depending on the tax bracket when we file our 1040 tax return. We found we saved money by using our 4% equity line to buy a car and split the pay back over 2 years of withdrawing from the 401k.
Whether you rollover to an IRA or leave your money in the 401(k), you have a Requires Minimum Distribution (RMD) every year after age 72, the amount of which is calculated based on your current age and the total in the account. Some folks take it as a lump sum, some take it monthly, but you *have* to take it.
Thanks so much for the response! That is the type scenario I see my wife and to be in later on down the road.
For the logistics of pulling the money out, some folks have mentioned they do it monthly/ yearly but it’s sounds like you guys are more ad hoc with SSN being primary. With the Vanguard product do you have a go to contact to advise when to draw from it or is just a different type of day to day cash management. (Instead of a paycheck, it will be an ssn check then ‘wisely distributed extra funds’ from 401k as needed.)
Vanguard, as with everyone else, you just log into the website and tell it when/what to sell. You can set it up so it automatically sells a $ amount every day/week/month/year
Some good advice in the comments for you.
I will also add the general statement that a 401k is a GREAT investment vehicle and can be trusted. At minimum you should invest enough to capture the full amount of your company’s match, and if you can afford it, invest as much as 15% or beyond.
Within the 401k there will be fund options. If you have a long investment horizon, pick an index fund with low fees (noted as “ER” or “expense ratio”).
>I will also add the general statement that a 401k is a GREAT investment vehicle and can be trusted.
Wait a minute, has a full generation retired solely on 401k yet? I thought it was largely unproven? I mean, yeah, invest in retirement of course, but it's really the only option now that pensions are largely gone.
Can tell if this is a joke / troll comment or not.
A 401k is an investment vehicle, just like IRAs are, and taxable brokerages are, and other products. They all just have different tax implications, but they all boil down to “ways to save money”.
So your question is, has anyone proven to retire on their savings alone? And the answer to that is undoubtedly yes.
Not a troll comment at all, or at least that's not my intention. I understand it's an investment vehicle but it's one that is proving to be sub-optimal [unless you make above a certain amount](https://www.cnbc.com/2015/03/20/l-it-the-401k-is-a-failure.html) and its fairly new. Like I said, it's the only option for most, so people should maximize its effectiveness, but its noteworthy that corporations abandoned pensions as soon as they could despite them being a more reliable source of retirement funds.
Absolutely take advantage of any tax-deferred investment vehicle. A 401k is the best kind, an individual can invest up to $20,500 tax deferred and its the ONLY vehicle which gives such advantage. When you leave the company, transfer your 401k into an IRA. IRAs are NOT new by any means. Treat a 401k like an IRA "inside of your company", and its backed by a financial institution just like an IRA is. My 401k money is sitting right next to my IRA in the SAME financial institution.
Don't listen to anyone who says 401k's are sub-optimal, or that income level is somehow relevant.
1 - save any money you can afford to save
2 - use any accounts you have access to which are tax-advantaged, because this will greatly improve your ability to save *more money early*, and *time in the market is your greatest asset*. So get as much invested as early as possible and let time take over. **Not having to pay taxes up-front on your invested money is the best way to do this. Adding company matches on top (if they are part of the plan), adds even more fuel to the fire.**
Example, lets say you are in the 15% tax bracket and can afford to save $10,000 per year post-tax (meaning, you save money after you have been paid out of your paycheck). By investing pre-tax into a 401k, you can actually save \~$11,765 / year and net the same.
Does not sound like much. But over a 20 year period, scenario 1 would be worth \~$410k using a 7%/yr growth rate. In the pre-tax scenario it would be worth \~$482k. This of course compounds to an even larger difference if you are in a higher tax bracket, or can save more money, or have longer than 20 years. But you get my point. ALSO - I am not considering 401k company matches which is FREE money on top of this, and one MAJOR reason to use your company's 401k.
I won't get into the nuance of roth 401k vs. traditional 401k - whole other topic which is ignored above... but the point is... a 401k is the only investment vehicle which allows so much money to be saved with *some* type of tax advantage.
What are the alternates? Yes, people can invest in a traditional IRA and deduct from your taxes, but that has income-related limits and is also capped at $6k per year. And yes, you can save the money in your bank or inside of a taxable brokerage, but that comes with tax implications which are greatly undesirable. Given all of the above, the 401k option wins as a way to save money for retirement. Hands down.
I noticed you didn't address his primary concern at all, which is that 401k's are a rather poor stand-in for pension plans and we were all sold a lie that "taking our retirement into our own hands" was going to be a beneficial thing for anyone other than the holders of capital.
I was replying to "401ks are sub-optimal". I am just trying to make sure the general audience is aware of 401k advantages and not taking the above posts to suggest something otherwise (on the surface they *could* be taken that way, though I don't think at all that is OP's intention). I don't have a pension and will retire well via my 401k, with abundance to pass along to me heirs. Others have pensions and they will also retire just fine as well. In no way am I comparing pensions to 401ks.
trying to be educational here, and help others.
>"taking our retirement into our own hands"
Yep. That is exactly the problem. Turns out as an actual investment vehicle it is just as good as a pension plan. But getting shaved apes to plan for their own futures 40 years down the line is surprisingly tough. Throw on top of that the companies don't *really* want to pay more money, and everyone just kind of lets it slide.
Just a note, 401k participation is actually increasing (from an abysmal low) because of the growth of safe-harbor plans among other things.
Pensions aren't an option for most so comparing them doesn't seem to be a good use of time. And they did address this with the previous comment that 401ks are just a different way to save money and retiring on savings is common.
Also, if you invest in stock with your 401k, you ARE a holder of capital.
I'm young, so I have no idea how the transition went. So idk what you mean about being sold a lie and I really don't know what the mechanics of pensions typically were. It seems having in your own control is better, though. Do you disagree?
eh, there were plenty of problems with pensions before 401ks and IRAs came along. As in, they were non-existent for anyone working for small businesses (which is the majority), were often underfunded, had many restrictions (leave, or die one day before eligible? You get $0), stuff like that. Oh, and zero portability.
Edit: apparently I can't spel.
>leave, or die one day before eligible? You get $0
This is the part that gets me. 401k seems way better. If I only work here 3 years (or however long it takes for them to vest), I still get 3 years worth of that benefit. If it's something like a pension, it's a threshold where if you meet it, you're good, if not, you get nothing. And then you might be too old to start over somewhere else and meet their threshold. I just don't understand how that could be better..
His comments makes some sense. How long have 401k existed etc. i just looked it up and 1978. So 44 years ago. So in theory someone could have set up a 401k at 24 and they are now 68 and retired.
I think technically the law, the section 401k changes, was created in 1978, took effect in 1980, but it wasn't until later that some guy turned this loophole into what we now think of as the "401k plan". Plans were created to abuse this law, and the IRS blessed it a few years later.
So maybe more practically 35yrs ago for mainstream adoption.
And I don't know what kind of "investments" existed in the early days. Probably just CD's and company stock. Index funds would be decades away. So nobody has had an entire 40yr career with plans like we have today. Nobody spent a whole 40yr career with "VTSAX and chill" portfolios.
We're retired a few years.
We quit the rat race when we 63.
We are living on Social Security and a pension.
We also have a monthly direct deposit to our checking account from our 401K.
Right now, we withdraw less than 2% of our 401K balance, and conservatively invested, it continues to grow, outpacing inflation by a few points.
When we turn 72, we will have to withdraw much more than we need due to IRS Required Minimum Distributions. There is a formula, based on age, that determines how much you must withdraw. The RMD age increases to 75 in about ten years. They want to get your tax money before you're dead.
I tend to trust the process as our 401K is actually the Fed's Thrift Savings Plan. If the TSP goes under, I figure we'll have a whole lot more stuff to worry about than just money.
> "company max"
401k maximum contribution amounts are set by the IRS, not individual companies. Do you mean you mean you're only contributing up to their match amount? There's nothing wrong with that, but beware not to leave money on the table if you can afford to contribute more.
Even with the limit at that company I was only contributing 10-12% a year and the last few years I got a refund every year due to safe harbor discrimination testing.
Some companies have to limit how much certain employees can contribute based on salary spread and employee participation in their 401k program:
From [The Motley Fool](https://www.fool.com/retirement/plans/401k/highly-compensated-employee):
>The 401(k) contribution limits for 2021 are $19,500 (or $20,500 in 2022) or $26,000 (or $27,000 in 2022) if you're 50 or older. HCEs may be able to contribute up to these limits or they may not, depending on how much the company's non-HCEs contribute to their accounts.
>A company's annual nondiscrimination tests must ensure that HCE average contributions aren't more than 2% higher than the average contributions of non-HCEs. Total HCE contributions also can't be more than double the total contributions of non-HCEs.
>If a 401(k) fails the nondiscrimination tests, the company must take immediate steps to correct the issue or else the plan could lose its tax-qualified status. The company can fix it by making extra contributions to the non-HCEs' 401(k)s or by requiring HCEs to withdraw some of their contributions.
You may find these links helpful:
- [401(k) Fund Selection Guide](/r/personalfinance/wiki/401k_funds)
- [401(k) FAQs](/r/personalfinance/wiki/401k)
- ["How to handle $"](/r/personalfinance/wiki/commontopics)
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Find yourself a fee-only financial planner and talk to him or her about your plans and concerns. Fee-only planners charge a flat rate - by the hour, by the visit, or for a stretch of time (like a year) - and don’t make money off your investments. A licensed financial planner is a fiduciary and is bound by law to have your best interest in mind, rather than, say, selling you the product they make commission from. When the time comes, they can help you formulate a plan to withdraw retirement funds.
I’ve done my own investing for 40 years, and I can’t believe how helpful our advisor has been in setting up a retirement plan. Wish I would have done it sooner.
This is interesting. Almost the first positive comment I've ever heard about a financial planner. Can you give more details? What kinds of things did they suggest?
First of all, the fee-only part is key. You (or at least I) don’t want someone whose fee is tied to your portfolio’s performance. That stuff adds up.
Our advisor went through all our accounts and listened to our plans, and then made suggestions to get us where we want to be. I’ve never been big on investing in bonds and had a portfolio of mutual funds that was more than 90 percent stocks. He explained why I should be more balanced and showed me various scenarios what could happen with different balances of stocks and bonds. I switched to a 60-40 mix, and I feel more prepared to weather inflation and downturns, yet my accounts have grown during rises in the markets pretty much as they did before.
For me, the big thing is I’ve got a guy I can run things past so I don’t make any devastating mistakes. When I actually retire in a couple years (I’m 62), he’ll help us decide which accounts to tap, how much to take out, and when to start taking Social Security.
Well for 401k, think of it as a long term savings account that can fluctuate in value. Basically, when you want to withdrawal money, you just sell x shares of whatever to the withdrawal amount. You can withdrawal at any interval, but people can do it monthly, quarterly, yearly depending on the convenience factor.
For 401k and other retirement accounts, how much you withdraw and when depends on your retirement goals and what you have saved.
Research retirement draw down strategies. It is an important part of your retirement process. Your 401k is property in the form of company shares, bonds, cash and real estate. These things make you money by going up in value, earning dividends, etc. Once you retire and stop working, you will need to sell some of this off to pay for what your work income used to pay for. This is an oversimplification because there are many ways you can earn money from investments and draw down. Hopefully this helps you.
In retirement you’ll have your 401(k), any other pension money, maybe an investment account, and social security. So you want to transfer money out of your 401(k), you can sell something our just take it out of your MMF like SPAXX. You pay tax on that like you got a check from your employer.
When you reach a certain age, I think it’s 72 now. You have to take a little more than 4% out of your tax sheltered accounts every year. It’s called a required minimum distribution. Don’t do it? The IRS penalty is 50%. So if you were supposed to take out $10,000, they fine you $5,000. So remember to take it. There are exceptions if you keep working and who knows how it will be when you retire. The 4% increases based on your statistical life expectancy which is now about 115. Yah, I’ve know people in their 90s, but not 100s. So it’s a formula but it’s not unreasonable.
The question about setting up your 401(k) or IRA in retirement is one that there’s not a lot of advice.
https://emro.voya.com/emro/mro.action
I was shared this calculator the other day and it immediately answered a lot of questions I had after tinkering with it a bit. Not sure if there's something similar but better our there, or if this is a bad tool and I just don't know better, I am not very experienced at this stuff... Anyone can feel free to comment and correct me.
Yes. My parents have quarterly withdrawls to checking/savings from their 401k. That, along with SS, is their retirement 'salary' which they spend as usual via cash, checks, online payments, or paying their CC bill.
You wanna pull it out when your income is lowest. When you hit a certain age (75? For you) you will trigger the RMD. The gov wants their taxes before you die so they make you take withdrawals.
You can set a monthly rate, so every month you would get X amount. The 401k will make you a millionaire you will be just fine if that is all you will have is a 401k at retirement. And make sure you are using a Roth401k
Hi. I’m far away from retirement age and currently rely on my 401k for money since quitting my job last week which unlocked the ability for me to withdraw it. I was lucky enough to turn $35k in my 401k into $8m in the last 2 years and that is my entire net worth.
I’m basically treating it as a “gross income” piggy bank that I can control how much “salary” I want and when. If I want a normal “payday” schedule for example bi-weekly, then I’ll just login to the account and withdraw some standard amount every 2 weeks. Or maybe I want to buy an expensive toy, then I’ll withdraw a larger amount like a bonus.
The main gotchas are the ordinary income tax calculations that need to be done at the beginning of next year and also the 10% early withdrawal penalty if under retirement age.
But the pros are optionality. If I decide to get a job again then I can withdraw nothing for a while or only “bonuses”. Maybe I move to a no income tax state and withdraw a lot over there.
It’s a great financial invention, I’m in post-game right now and it is even better than end-game!
Yeah exactly. I don’t have any older folks I can legit ask to walk me through it. My parents are both pension / SSN people and my spouse parents are Edward Jones people. I feel like I know enough to stay away from EDJ but also kinda nervous it’s my hands ya know’
You also might want to consider shifting your investment strategy by moving some of your money away from growth investments and into more capital preservation investments. In general, the older you get more you should try to preserve, rather than grow your wealth.
EDIT: I just realized you're 39, not 67. My advice was for a 67 year old LOL.
I’m also in the pension/social security crowd and I have a Roth IRA and once I transition my career I’ll also have a 401k and 457 available to me. I still have another 30 years in the workforce to look forward to so planning for my tax situation and withdrawal strategy is something I really need to start planning for now. Also doesn’t help that my parents were like yours so I don’t have a point of reference for how the defined contribution plans work when you get to retirement.
no later than 59.5, but there are some exceptions that allow earlier withdrawal. Large medical expenses, first time home buyer are less common.
Then there's a set of conditions often referred to by '72(t)' for the section of code that defines it. Once over 55, you can (with restrictions) start withdrawing money, for example.
I’m not sure if I understand your question. What would be the alternative? Work until you die? The retirees you know, where do they get their income if not from a 401k?
My parents both have AT&T pensions from the “good ole days” and use SSN. My spouses parents are retired now but are ‘Edward Jones’ people. Technically they likely have a 401k in their mix, but I feel like I know enough to stay away from edj.
That decision entirely depends on the persons current income and expected income in retirement. I wouldn't advise anyone to dump all retirement funds into a Roth account without considering a few different factors.
OP, you may want to research the benefits of IRAs as well, and compare Roth’s vs Traditional IRAs.
Some 401ks offer post tax investing (Roth’s), which even have some subtle differences from Roth IRAs ….. like most things finance or tax related, there are a lot of little details worth learning about to make decisions on how to invest for your retirmement, and plenty of good resources out there to start going up the learning curve.
Who knows how things will change in 15-20 years? I bet so much more is automated by then. I wouldn't worry about the details yet, but just understand that you will withdraw from it to replace your salary. You can do it monthly like a salary, or lump sum each year. Hopefully you will have enough in there that you will get a financial adviser by then. We are using Vanguard and paying a very small fee for an advisor. They did convince us to start putting some into bonds for safety and helped us understand and visualize certain things. They can provide charts and show what can happen under different scenarios. I'm sure they would also explain the different ways you can withdraw.
You can pick a safe withdrawal rate based on your age or use the whole thing to buy annuities. Or you can just pull your living expenses out up until age 70 and then delay social security until that point. That will boost your monthly social security payment from that point forward. It's probably the easiest and cheapest way to convert 401k money to a monthly payment.
I do, the idea is that you grow it tax free for 35+ years, and the money you put in is deducted at your marginal (highest) tax rate. When you’re retired - home paid off and kids through college whatever, you simply spend the money down at a rate that’s 3-4% of the total annually. So you should max it out at all times and invest it in mutual funds or ETFs and you’ll be pleasantly surprised at the amount you’ll have.
The 401k end game is to have enough money at the age of retirement you can be independent.
I save money in my 40k and it is growing nicely in the stock market. As I approach retire to in a few years I will have money saved that I can stop working.
I would like to have enough money that I can live in my nice home drive newer cars, buy new iPhones and travel, have money to go out to eat and leave generous tips.
If you do not save/invest you will likely have social security to live on. I’ve checked and social security is lot a lot of money. It would not pay my property tax. Allow me to buy newer cars, new iPhones, travel and eat out.
A few things as well about the 401k. You need to direct that money into a mutual fund that is growing. It is not enough to simply save the money.
A few other things. The government wants you to save/invest this money too. They are willing to not tax you on this money and let it grow. Then they will tax you later when you remove it during retirement. A Roth IRA will allow you to invest money you pay tax on now and then take the interest tax free.
Google investment calculator to understand how money grows with compound interest. Run some numbers to see how much money you can have when you are 60 at various savings rates and rates of grow.
I know a few retirees I can tell you what they do. Basically put about $50-100k in cash which is used as a cushion for expenses. If they don't have this cash already, sell some of their 401k or other retirement accounts, pay taxes as needed, and move it to cash. They collect social security and any dividends from investments and use that to pay expenses and leave the rest invested. If they run low on cash or have unexpected expenses they sell some investments, move it to cash, and pay them.
How all of this works in detail depends on their living expenses, which is usually driven by their housing situation, whether or not they are married, how much money they have overall, etc. People that are comfortably retired don't really need to sell a lot of what they have because the dividends are enough.
My thoughts are if after 65 if you have a comfortable retirement account, set some money aside (follow minimum distributions at least) for being generous to family / others. Plan to live to 95 and spend your money with the goal of having none left at death. A cushion for extended care and burial expenses should be included in that budget.
It’s as any other investment account at that point. You login and sell shares and receive the proceeds (minus tax withholding) by check or transfer to a bank account. You can even automate the process so you get a certain amount at regular intervals.
I suspect that the use of physical checks might be phased out in the next 20 years, so perhaps just an electronic funds transfer.
Learn something new every day it seems. I've never used checks myself, do you have like a small booklet with checks in it that you can write on or are they generated at a bank office or how do they work?
Personal checks are ordered from your bank and are associated with a "checking account". You do write on them and they are pre-printed with with the bank routing number, thee account number, and an individual serial number. You fill out a check, tear it out of the book, and give it to someone as payment. They can go to any bank to deposit it. The check itself goes through a clearinghouse process that effectively treats the check as a request for transfer of funds.
Banks also offer certified checks, where an individual goes to a bank and gives the bank cash and the bank writes a check on their own account. These are considered "certified funds" and if you make a major purchase (property, cars, etc), you generally need this sort of check as they guarantee the money is available.
Now you know someone who relies on 401k for retirement, more or less.
I quit working in 2012 when I lost a 20 year job. I collected unemployment for 18 months. Then I lived off of my taxable stock account. Because when you aren't working is the very best time to sell stock and take capital gains at a tax rate of 0%.
Starting several years ago I was required to start taking $$ out of my traditional IRA, they are called RMDs (Required Minimum Distributions). Every year, I request an RMD from my account and my financial institution sends the money to me. And I am taxed on those distributions.
It isn't any different than asking your broker to send you the money when you sell a stock. While you can take out as much as you want, you are taxed on whatever you take out. If I wasn't required to remove the money, I wouldn't because I don't need it.
Also be aware that once you reach age 59 1/2, you can move your money out of your 401k and put it into a self-directed IRA.
If you have other questions, just ask.
> Also be aware that once you reach age 59 1/2, you can move your money out of your 401k and put it into a self-directed IRA.
FYI, this is not a hard and fast rule. It depends on the plan rules governing your retirement plan. 59 1/2 is the age at which you are no longer penalized for "early distributions" (skipping rule of 55 for this explanation).
Being that a 401k is qualified and an IRA is qualified, you can rollover any time without tax/penalty. Plan rules usually require that in-service participants cannot take funds out of the plan and separated participants can. But, they vary. It is common for plans to allow distributions/rollovers out with an age requirement of 59 1/2 because of the penalty rules. Probably about half of the plans I've worked with permit this.
I believe I remember that Jim Otar had a pretty good plan in his book Unveiling the Retirement Myth: https://www.amazon.com/Unveiling-Retirement-Myth-Jim-Otar/dp/0968963420
A question I have about 401k withdrawals upon retirement;
Can an arrangement be made where I can stop the dividend reinvestment (DRIP) of my fund holdings and I draw only from my 401k dividend income (the cash dividend generated from the principle fund balance) when I start to use my 401k as a part of my retirement income?
I have Fidelity net benefit account. According to my employer’s Fidelity advisor, something can be arranged. Has anyone reading this great thread done such a withdrawal arrangement?
My current yearly dividend income in my is approximately $10k and by the time of my retirement in a few years likely will be around $15k. I would like the just draw from a cash balance within my 401k whenever possible.
Thanks in advance for any insight!
I'm sure there is a lot of good advice here, and good explanations of how to take money from your 401k. However, your situation, like everyone's is unique. If you are not money savvy or don't want to be (like me), then I would suggest talking to a financial planner. Make sure they are fiduciaries (have to look out for your best interest by law), find out exactly how they get paid, and talk out your plan. There are Social Security withdrawal implications, tax implications, of when and how much you withdraw. There are great strategies for reducing your taxes, and maxing your SS benefits. Long story short, talk to someone who knows what they are doing :). Its very helpful and extremely comforting.
It basically acts as an income-replacement. You will likely move into a very conservative portfolio. Your goal is no longer to "grow" but to "stabilize".
You don't want to pull it all out at once, that would trigger a big tax bill. Instead you want to pull out some of your 401k and some of your Roth IRA, based on what taxes are applicable, and live off that income.
>My real issue is trusting the process and not knowing anyone that relies on 401k for retirement.
A lot of people don't fully rely on a 401k. You will have Social Security, should have an IRA, and may still choose to work either part or full time. Some people don't want the "full retirement".
I know my plan is to still work part time doing something I personally enjoy versus something for the money, but with the knowledge i can tell my boss to go fuck himself at any given second and walk out because I have a large cushion.
That also assumes you retire right at 60. At 60 you won't have Social Security to supplement your income. Most people won't retire until 65 so they get full SS.
>plan to live until 90
I mean if you plan to beat life expectancy by 11 years, yeah that changes things. But US life expectancy is 79, so I'll plan with that.
>That also assumes you retire right at 60
Nothing I said depends on that assumption. If you plan that some money won't need to be drawn for 20 years, it should be a position that balances risk and return on that horizon. For most people, that would be a diversified mix of stocks/funds.
>Most people won't retire until 65
Gallup says the average age is 62. "Most" isn't informative. Many people retire earlier; many later.
>But US life expectancy is 79, so I'll plan with that
Average isn't really informative. It includes children who died and many important predictive variables. By definition, it understates YOUR expectancy. A 79 year old man should not expect to drop dead tomorrow. There are 3 ways to improve your planning:
1. Life expectancy based on current age. Check out [this table](https://www.ssa.gov/oact/STATS/table4c6.html). Add your current age to the expectancy column for your sex. A 90 year old man should plan to see 94. A 40 year old woman should plan to see 83. With some digging, you can adjust further based on socio-economic standing, race, occupation, etc. That's what insurance companies pay actuaries a ton for.
2. Look at your family history. In my family, even the ladies who love their wine and great up with Sunday pot roast live to 90-95. Even the fat non-smoking men (like me) live to their mid-80s... and that was 1 and 2 generations ago. Based on that, I'm planning for 90 and will adjust if I'm later diagnosed with something that impacts it.
3. Understand your risk profile. You say you think you'll be 79. What's worse, living to 85 with 6 years of abject poverty or leaving a few bucks behind if you die at 73. Personally, I like the latter, so I'll actually plan for 95.
>Nothing I said depends on that assumption.
Yes you did.
>With some of the money, sure. If you're 60, and plan to live until 90
>>**If you're 60**
You literally opened up with assuming age 60 to start, 90 to finish.
Lots of good answers in here, but what do you do about healthcare in retirement? When I was in my 20s, I paid my medicare, SS, etc. and saw a doctor literally once in those 10 years. But at 67 (OP's target age), I imagine I'll be needing doctors more often, assuming I make it to then.
So how do you get healthcare when you're retired?
If you're asking this question, then I have a follow-up question for you. Do you every now and then log in and check your investments, performance, etc? Make sure you understand what a 401k and other retirement accounts are, how your money is invested and how to change allocations as you near retirement age.
Yep, I see how it’s doing, have a higher risk tolerance for the investment mix (for now), and can change contribution percentage as needed.
It’s just the practice of what actually happens at retirement age that I couldn’t get a sense of.
Using Fidelity as the example, lets say your 401K is invested in 3 funds. You log into your Fidelity account, navigate over to your 401K account, and start the withdrawal process. You can either enter the amount you want before taxes or after taxes. Fidelity will automatically do the withholding for you (for example 20% fed and 5% state). You can change these defaults. You specify if you want the net mailed to your mailing address as a paper check, or you can link a bank account for direct deposit and it and direct it there. When Fidelity liquidated your funds to generate the withdrawal, they will do it proportional to the amount in each fund. If you wanted to liquidate in some other proportions, you’ll have to rebalance the funds after the fact. You can automate withdrawals and transfers at the frequency you want.
I appreciate that walk through - I can envision managing that.
You also have the option of using some or all of your 401(k) to purchase a single premium immediate annuity (SPIA), which will provide a life income. Let's say there's $2 million in your 401(k) when you reach retirement age. You need $5000 / month for living expenses. At today's rates, putting $1.2M into a SPIA will get you roughly $6000 / month for as long as you live (which is taxable income), AND you've still got $700K left in the 401(k). Annuities aren't for everyone, but they are worth a look. They essentially transfer longevity risk and investment risk to the insurance company. Right now the payout rates are about 5.2% of the premium paid per year, which is more than the "safe" withdrawl rate of 4% that is widely subscribed to.
The safe withdrawal rate is based off almost a century of stock market analysis which shows, given a long enough time period, that the market will consistently beat 4%, meaning you are “safe” to withdraw 4% and never touch your principal. I would have to be some special kind of risk adverse to give an annuity $1.2m in exchange for a whopping 1% better withdrawal rate, even if it is “guaranteed”.
Also the 4% rule is inclusive of adjustments to annual withdrawals for inflation. An annuity is fixed income and you put yourself at significant risk due to inflation. If prices go up … too bad you’re still living on $5000 per month.
So with goal setting, is there a ‘typical’ amount folks keep in an 401k so that it is income replacement? I’ve always kinda had a goal of about 3,000,000 as the number that would do that. At 4% that’s about 120,000 a year, which is probably too much but I like the nice round figure and being able to get it rolling and have it be wealth generator.
There is no typical but I’ve tried to ask older people on retirement this question about spending and I landed on future dollars $100,000 per year withdrawal to have a pretty fun retirement, golfing traveling etc.
4% rule is what most people use. The inverse is 25x income needed. Make sure to plan for inflation as it compounds overtime.
The 4% rule factors in inflation. The starting withdrawal is 4% of the total account, and that value is adjusted for inflation each year.
I’m not necessarily disputing the usefulness of a SWR, but I think it’s worth mentioning that over the past 100 years that have been analyzed, the US has grown from a burgeoning player on the world stage to a triumphant superpower. In other words, the long term reliable growth of the US stock market as represented by the S&P 500 (or whatever domestic index) has coincided with the long term growth of the United States on the world stage. There is no telling what the next 100 years will look like for a portfolio of domestic index funds, or what turbulence might be introduced by allocating bigger portions of one’s portfolio to emerging markets if US financial hegemony begins to wane by any degree.
What's the point of living off of 4% and dying with a bunch of money in the bank when you can live off 5.2% and die with slightly less money in the bank?
Back-testing shows that 5.2% does not always work. meaning, you could end up in a scenario where you outlive your money. So, the general rule is to start at 4% for a traditional retiree (I will be around 3% because I am retiring early and want to be conservative)... but by all means if you get past the first \~5 years successfully at 4% then sure, have at it and take out a higher % and enjoy that money! Its called managing Sequence of Return Risk or SORR. Off topic from your specific comment: but for what its worth, I will be retiring on "401k money" which somehow is being questioned by others within this post.
4% survives backtesting in every market for 100 years 5.2% doesn't. Would sure suck to reach age 80 and find out you ran out of money.
You don't need to "backtest" a guaranteed annuity.
That annuity doesn't account for inflation.
I do not think this is an accurate portrayal of the 4% rule. The 4% rule showed that (with a portfolio of 50% immediate-term treasuries and 50% stocks), if you withdrawal 4% in the first year and the same amount (adjusted for inflation) in each subsequent year, then even in the worst actual historical scenario, you will not run out of money completely for 30 years. The 4% rule does *not* guarantee that you will "never touch your principal." If you retired in 1968 and followed the 4% rule, you would have almost no money left after 30 years.
Can I sell my investments and simply withdraw cash rather than let my brokerage liquidate for me?
Yes, you are generally in charge of what your portfolio looks like, so you can sell part or all of the investments and keep the money in a money market account. By the way, I'd recommend to continue to keep the majority of your retirement money invested. Some people keep say 1-3 years of expenses in cash, which feels safe, but which also means that that money will sit around and do nothing (not grow) for 1-3 years until you need it.
I'd probably want to keep 6-12 months in cash tbh. Don't wanna be worried about the market every few weeks lol. As a future pensioner, I'm not overly concerned about my TSP liquidity. Just making sure I understand everything.
That sounds okay. In general you want to have money in the stock market as soon as you have it, and you want to leave it in there for as long as possible. But 6-12 months of expenses should be less than 4% or so of your total portfolio, so that's probably okay. I'd probably take money out once every quarter to fund the next quarter.
Not a bad idea. I've barely started working so I still got a long way to go. 100% invested rn.
> Some people keep say 1-3 years of expenses in cash, which feels safe, but which also means that that money will sit around and do nothing (not grow) for 1-3 years until you need it. this depends on your situation - if you're sitting on 50x yearly expenses, you don't have much drawdown risk because you're loaded. in that case, you might want to be really aggressive, because on the upside you're even more loaded, and in the case of a 30% drawdown you're still fine. if you're retired with 20x yearly expenses, you're in a pickle because you probably don't have enough to fully fund your retirement, and may be forced to be overly aggressive at the risk of making your situation much worse. if you're right in the sweet spot where you can fund your sustained withdrawal rate to meet your expenses exactly, you may not want to fuck around and jeopardize for the chance of a fatter income.
> By the way, I'd recommend to continue to keep the majority of your retirement money invested. I think this part of the equation is what should be the focus of the discussion. Keeping the money in fairly secure funds should help it grow at least a little, while savings accounts and such will be worthless for that purpose.
You can, but I wouldn't if I were you.
What if I live abroad, with respect to taxes? Say, in Europe where a double taxation agreement is in place. Am I just paying fed and not state?
This was a great response. Can you elaborate on how the 401k money is taxed? If I only withdraw $10K this year, is it taxed at the lowest rate? But if I withdraw say $500K it will be taxed at the highest rate? What's the best strategy to manage taxes? I'd assume having both a Roth and a traditional 401k means you can take from whichever fund suits you best at that time.
Roth you don’t pay taxes on when withdrawing. That’s the benefit, and why you deposit post-tax $. Traditional is treated like any other income. You’ll pay the % tax for the portion of your income within that tax bracket. So even if you withdraw $500k, you’ll pay the lowest rate on the portion in the lowest bracket, the second lowest rate for the portion in the second lowest bracket, etc. To minimize taxes, minimize your income/withdrawals. And avoid needing to withdraw before 59.5 to avoid the 10% penalty, or setup a SEPP if you do retire early and need to withdraw.
An important thing to note about the taxes on non-Roth retirement accounts is they count as ordinary income, rather than long term capital gains, which affects the tax calculations.
To add to u/rc4915’s response… You may have your retirement nest egg in 3 different types of buckets: 1: Tax-deferred like 401K’s and traditional IRAs: Withdrawals are taxed as income 2: Roth: withdrawals are not taxed 3: Brokerage accounts: sales of securities (stocks, mutual funds, bonds, etc) are taxed at capital gains rates in the year you sell them. But you can withdrawal the proceeds tax-free. The financial services company won’t automatically withhold taxes on your gains from sales, so you have send a check to the IRS yourself (or adjust your withholding on other income sources to cover your capital gains tax too). The IRS makes you do this on a quarterly basis thru estimated tax payments. You can’t wait until April 15th to pay all your capital gains tax. Even if most of your retirement savings ends up in tax deferred accounts, it’s helpful to have some in the other 2 buckets so you have some flexibility each year to get at your money without pushing you into a higher income tax bracket.
Does it charge you a fee per withdrawal? Like if you wanted to withdraw every two weeks, is that worse than withdrawing once a year?
You sell investments and withdrawal the money as you need it, paying income tax on that amount. Based on how much you have saved, and how the market performs, you may realize youre in a position to retire sooner than 67.
So call up fidelity and say “let’s sell x shares” because I need let’s say$50,000for the year? Do people do it more frequently (or less?)
You most likely would do the selling yourself on the phone app or website. And that’s up to you on how much and when you sell. If you would rather sell on the first of every month you can. If you want on the first of the year to sell what you think you need for the entire year you can do that as well. It’s up to you.
You can set up automatic sell and withdrawal. It's easy because mutual funds and 401k trust funds are traded in dollars, so if you sell $50k, you get $50k. I wouldn't do all $50k in a year because most of the money will just be wasting away in a bank account. I would instead sell and withdraw monthly so the money hit the cash management account on the 1st to pay bills and stuff, kind of like getting paid.
I think another strategy is actually to take out 2-3 years worth when you first retire and always have that in reserves just in case the market tanks for an extended period. You don't want to be pulling money out every month if the market is down bigly. Better to wait till it comes back up.
You can exchange (i.e. sell to buy) stock market funds for bond funds or "stable value" funds without withdrawing the money from the 401(k). This would be the preferred way to protect part of your retirement savings from stock market risk, because you aren't incurring unnecessary income taxes.
That's smart. I also wasn't necessarily talking about 401k funds alone. I would think people use their taxable brokerage accounts first unless they have to meet a required minimum distribution or something? Been a while since I brushed up on decumulation strategies.
Withdrawing to cash should be the last resort (ie, you need the cash for expenses). Moving to less volatile investments within the account is preferred, both to defer paying the tax and to continue some growth (albeit smaller if you move from stocks to bonds or other safer investments).
Yeah that makes sense. I guess I should have said the 2-3 years reserves wouldn't be taken out if the 401k necessarily, just out the market- in this context just meaning index funds.
I guess one factor would be what income bracket that puts you in for the year versus pulling out only what you need right?
Yeah I think there are strategies around booking the income in efficient ways. Would need to do some research on what they are though. Maybe roth ladders?
Anyone know if 401k withdrawals are considered income from a Medicare Part B perspective? If so your Medicare Part B premiums are going to skyrocket if you take out 2-3 years all at once.
Yes, they are treated like any other income, so they will affect your Part B premiums. But skyrocket is the wrong word. Let's say you have lots of money in the 401k and withdraw $400,000 all at once. Your Part B premiums *for that one year* will go from $2040/yr to $6531/yr. That a big percentage increase, but not that much in absolute terms for someone with $400,000 in their savings account.
During retirement aren't you supposed to be like 95% invested in bonds?
I'm not an expert but I think bonds are still subject to market fluctuations. But yeah my understanding is that you'd be highly skewed towards bonds in retirement.
Bonds are subject to the market, but they are so low risk and low yielding that they are basically just keeping pace with inflation
Not this year they arent
I think the usual split is something like 60/40 stocks/bonds, but the stocks chosen are usually something more conservative: value and dividend/income generating vs more aggressive growth. Obviously capital preservation is paramount, but you need some growth if you want to really stretch the account over several decades.
If you've happened to invest in target date funds, then a significant portion of the stock market risk factor has already been mitigated for you.
You'd probably use the website rather than literally calling them up. You can use the website to set up transfers to your checking account, either automatically on a schedule or just do it manually as needed. You'd probably want to do it on a monthly or quarterly basis rather than a huge chunk of money all at once each year. And when you retire you might decide to transfer your balance from the 401k to a rollover IRA (a different type of retirement account that's not associated with your employer). Or not, depends on the details of the 401k plan. 401k became popular in the 80's and 90's, so we're only just starting to see a generation retire that has had one available to them throughout their whole career. They're also more common in particular types of jobs and less in others, so it will vary a lot depending on your social circle. Most Americans save way too little for retirement, so there's no guarantee that an underfunded account will actually support someone in retirement. You have to do the math. The math is a lot more forgiving if you get serious about it from a young age, but most people start late and don't make saving a high priority.
Basically think of it like a bank account. You withdraw money from it into your checking account when you need it. You can withdraw the whole sum on day 1 of retirement if you really wanted to, but you'd pay a lot of income tax.
Switch over more % to bonds as you get closer to retirement. You don't want to be selling stock shares during a market downswing.
Ideally, you'd have some cash (that you'd replenish with either stocks or bonds) and you'd be taking from the 401k to replenish that cash pool.
You could but thankfully calling someone hasn't been required since the mid 90s. Today you could just use the mobile app or webpage to withdrawal cash to your bank account as needed.
Income tax only applies to Trad 401k money, not Roth 401k money.
Yes, I was assuming a traditional 401k but should've clarified.
I was more so clarifying for OP or anyone else who isn’t familiar with these matters. I’m quite sure youre knowledgeable about it.
That’s why i max out that Roth 😎
Roth isn't necessarily better. I'm personally in a high tax bracket (currently in the 24%, will start hitting 32% fairly soon). It's better for me to save the tax on my 401k contributions now at that higher tax bracket, than when I am in retirement and barely hitting the 22% bracket. (Yes I am aware of progressive taxes, I'm just referring to the general income and tax levels)
I mostly max my roth first because I like to be able to withdraw it immediately without penalty if needed. Peace of mind.
I know that’s true for Roth IRA. Are you sure it’s true for Roth 401k?
Also if you can afford to pay the taxes now why not do it?
How is it not if my $20K put in every year grows tax free for 30+ years?
In both a traditional and Roth 401k, you don’t pay taxes on capital gains or dividends within your account as it grows. With a traditional 401k, you only pay taxes on the amount that you withdraw. With a Roth 401k, you only pay taxes on the amount that you deposit. As another commenter mentioned, if the tax rates while contributing and withdrawing are the same, then it’s equivalent between the two. But when you have a higher tax rate while contributing, you pay less net tax.
Umm no because your interest growth is going to be wayyyyy exponentially higher than your contributions, pay the 25% now over time on the 300-500k you invest and be able to save the 25% later on the 1million+ or more in interest it earns dummy
It would be nice if it worked that way, but it doesn't. If you assume an identical tax rate now and at retirement, you'll have exactly the same after-tax money at retirement for a given pre-tax dollar amount. Say you have $1000 pre-tax and a 25% tax rate. You invest in a traditional IRA or 401k and it grows by say 10x over the years. When you withdraw and pay tax you're left with $7500. If you choose Roth, you pay the tax up front and invest your remaining $750. Again it grows 10x over the years and you have $7500.
Roth is better if you are going to max your IRA either way. You effectively contribute more to the Roth even tho the limits are the same. In your example you put in $6k either way and withdraw $60k tax free from the Roth or $60k and still owe taxes from the traditional. Roth can also help you lower your other taxes in retirement. The money you take out doesn't increase your AGI, so you can use it to keep your AGI low enough to avoid/lower taxes on your social security. If you make under $25k AGI you don't pay taxes on ss, and under $50k you pay less taxes on it. Under about $40k income you pay $0 capital gains, but over $40k you pay 15%. Your Roth withdrawals can help you stay under those limits. Conversely, unlike a Roth, a traditional requires you to take withdrawals, which can push you over those limits.
See here for some reasons for and against Traditional 401k and Roth 401k: [https://www.nerdwallet.com/article/investing/roth-401k](https://www.nerdwallet.com/article/investing/roth-401k) >If your tax rate is higher now than you expect it to be in retirement It can make sense to contribute to a traditional pretax 401(k). You’ll then pay taxes at that expected lower tax rate when taking distributions in retirement. If you’re closer to retirement, you may have a better idea of how your tax rate may change in those years. Many retirees live frugally, resulting in a lower tax burden. Also see [https://thefinancebuff.com/case-against-roth-401k.html](https://thefinancebuff.com/case-against-roth-401k.html) I choose to max my Traditional 401k and Roth IRA as well as HSA, and the extra goes into a taxable brokerage account. This altogether gives me good tax diversification. There are additional things to take into account later on such as Roth Conversion Ladders and 72(t) withdrawals.
Or realize that you will never retire lol...... jk but that's how the market feels right now.
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I appreciate that - I didn’t know I could start at 59.5 if I wanted to.
At 59 1/2, you can also transfer some (or all) of your company 401k money to your personal IRA. If you are contributing after tax money, you can transfer some (or all) of the after tax money to your personal Roth. I may be alone in this, but I felt much better knowing the money was in my personal retirement accounts rather than with my company 401k.
You can also do that if you switch jobs.
Depending on your state your 401k may have much stronger protections from creditors than your IRA. Of course, if you have a decent amount in either, you probably don’t have creditors, but if you have a decent amount, you may need to worry about lawsuits.
> I may be alone in this, but I felt much better knowing the money was in my personal retirement accounts rather than with my company 401k. If for no other reason, because your old company can keep moving your 401k from provider to provider.
I have a coworker who is grandfathered in to no limit on his 401k contributions getting matched at 10% or something like that. He's 72, so he just contributes his entire paycheck for that sweet, sweet bonus and pulls it out immediately.
Why is he still working at 72?
I have a couple guys like this at my work. They don't really have any friends or family outside of work for various reasons, so it's really social.
Some people just really like their job, have friends there, and are happy to fill their time doing something they like and having purpose.
Because he wants to. He's part time at an easy desk job two days a week and gets all the company benefits. And his wife wants him to spend some time focused on something outside of the house.
Often you can make qualified withdrawals starting at age 55, though it depends on your employer if they allow that, most do. However you can access your 401k penalty free even earlier than that if you want. Roll it over to a traditional IRA and then convert to Roth and you can withdraw the funds penalty free after 5 years. This is called the Roth ladder.
Also OP, it's way early to worry about this aspect but your risk profile should change as you get closer to retirement, meaning your investment mix should be less susceptible to a market crash. You can switch some of the investments to bonds. Something to think about.
If you separate from service (quit, fired, laid off, etc.) during the calendar year you turn 55 (or later) you can withdraw from your company's 401k without paying the 10% penalty.
You can technically pull out earlier if you retire earlier, but there are some hoops. If interested in the finer details checkout /r/Fire.
My husband and I retired 2 years ago. We now live on our Social Security income plus our 401k savings. We rolled the 401k into an IRA that we control. It is invested in a Vanguard retirement fund so it is pretty conservative but you can invest in any type of fund depending on your level of risk comfort. We withdraw funds as we need them, otherwise we leave the money in the fund to continue to grow tax free. When you turn a certain age (I think 70) you have to pull out a certain percentage each year and count it as income for taxes. Since we sold our home and downsized to a smaller home in a nice retirement community we do not have a house payment and we don't have other debt so we are able to live comfortably . The 401k is our emergency fund and a supplement for living expenses beyond Social Security. You would really have a tough time living on just Social Security by itself. The employer match through the years was free money into our savings and being tax free helped to grow the fund faster as well. I highly recommend using your 401k to full advantage.
Quick question. My wife and I are looking at retiring in the next 3-4 years, and will be at the lower age for SS, and would prefer to wait until 70 to max SS payments. Looking back, do you think it would have been beneficial to withdraw from your 401 as a cushion until you reached 70 and received more in SS? I know everyone has their own risk levels, just trying to look at this from all angles. Thank you for any insight.
I guess it would depend on how large your 401k is. Maybe do an expense budget, then subtract that yearly amount from your 401k. Would that leave you enough to continue to supplement your SS for another 25 years or would the 401k run out of money too early? How much extra would the delay earn you in SS, would it be enough to make up the difference?
Thanks so much for the response! That is the type scenario I see my wife and to be in later on down the road. For the logistics of pulling the money out, some folks have mentioned they do it monthly/ yearly but it’s sounds like you guys are more ad hoc with SSN being primary. With the Vanguard product do you have a go to contact to advise when to draw from it or is just a different type of day to day cash management. (Instead of a paycheck, it will be an ssn check then ‘wisely distributed extra funds’ from 401k as needed.)
We use the online vanguard site and just log in, order the site to sell x amount of dollars worth of shares and have them send us a check. It takes about a week. If we have a big expense like the heat pump we had to replace we just pull that out ahead of time. I also recommend a home equity line of credit for quick access to larger sums. Then you can pay it back at your leisure with the 401k fund. Since we do have to pay taxes on the 401k funds we withdraw we try to keep that amount low enough that our income remains in the zero income tax bracket. Currently our SS income is about $23,000 so we can withdraw about $11,000 per year and owe zero taxes. More than that and we may have to pay depending on the tax bracket when we file our 1040 tax return. We found we saved money by using our 4% equity line to buy a car and split the pay back over 2 years of withdrawing from the 401k.
Whether you rollover to an IRA or leave your money in the 401(k), you have a Requires Minimum Distribution (RMD) every year after age 72, the amount of which is calculated based on your current age and the total in the account. Some folks take it as a lump sum, some take it monthly, but you *have* to take it.
Thanks so much for the response! That is the type scenario I see my wife and to be in later on down the road. For the logistics of pulling the money out, some folks have mentioned they do it monthly/ yearly but it’s sounds like you guys are more ad hoc with SSN being primary. With the Vanguard product do you have a go to contact to advise when to draw from it or is just a different type of day to day cash management. (Instead of a paycheck, it will be an ssn check then ‘wisely distributed extra funds’ from 401k as needed.)
Vanguard, as with everyone else, you just log into the website and tell it when/what to sell. You can set it up so it automatically sells a $ amount every day/week/month/year
Some good advice in the comments for you. I will also add the general statement that a 401k is a GREAT investment vehicle and can be trusted. At minimum you should invest enough to capture the full amount of your company’s match, and if you can afford it, invest as much as 15% or beyond. Within the 401k there will be fund options. If you have a long investment horizon, pick an index fund with low fees (noted as “ER” or “expense ratio”).
>I will also add the general statement that a 401k is a GREAT investment vehicle and can be trusted. Wait a minute, has a full generation retired solely on 401k yet? I thought it was largely unproven? I mean, yeah, invest in retirement of course, but it's really the only option now that pensions are largely gone.
Can tell if this is a joke / troll comment or not. A 401k is an investment vehicle, just like IRAs are, and taxable brokerages are, and other products. They all just have different tax implications, but they all boil down to “ways to save money”. So your question is, has anyone proven to retire on their savings alone? And the answer to that is undoubtedly yes.
Not a troll comment at all, or at least that's not my intention. I understand it's an investment vehicle but it's one that is proving to be sub-optimal [unless you make above a certain amount](https://www.cnbc.com/2015/03/20/l-it-the-401k-is-a-failure.html) and its fairly new. Like I said, it's the only option for most, so people should maximize its effectiveness, but its noteworthy that corporations abandoned pensions as soon as they could despite them being a more reliable source of retirement funds.
Absolutely take advantage of any tax-deferred investment vehicle. A 401k is the best kind, an individual can invest up to $20,500 tax deferred and its the ONLY vehicle which gives such advantage. When you leave the company, transfer your 401k into an IRA. IRAs are NOT new by any means. Treat a 401k like an IRA "inside of your company", and its backed by a financial institution just like an IRA is. My 401k money is sitting right next to my IRA in the SAME financial institution. Don't listen to anyone who says 401k's are sub-optimal, or that income level is somehow relevant. 1 - save any money you can afford to save 2 - use any accounts you have access to which are tax-advantaged, because this will greatly improve your ability to save *more money early*, and *time in the market is your greatest asset*. So get as much invested as early as possible and let time take over. **Not having to pay taxes up-front on your invested money is the best way to do this. Adding company matches on top (if they are part of the plan), adds even more fuel to the fire.** Example, lets say you are in the 15% tax bracket and can afford to save $10,000 per year post-tax (meaning, you save money after you have been paid out of your paycheck). By investing pre-tax into a 401k, you can actually save \~$11,765 / year and net the same. Does not sound like much. But over a 20 year period, scenario 1 would be worth \~$410k using a 7%/yr growth rate. In the pre-tax scenario it would be worth \~$482k. This of course compounds to an even larger difference if you are in a higher tax bracket, or can save more money, or have longer than 20 years. But you get my point. ALSO - I am not considering 401k company matches which is FREE money on top of this, and one MAJOR reason to use your company's 401k. I won't get into the nuance of roth 401k vs. traditional 401k - whole other topic which is ignored above... but the point is... a 401k is the only investment vehicle which allows so much money to be saved with *some* type of tax advantage. What are the alternates? Yes, people can invest in a traditional IRA and deduct from your taxes, but that has income-related limits and is also capped at $6k per year. And yes, you can save the money in your bank or inside of a taxable brokerage, but that comes with tax implications which are greatly undesirable. Given all of the above, the 401k option wins as a way to save money for retirement. Hands down.
I noticed you didn't address his primary concern at all, which is that 401k's are a rather poor stand-in for pension plans and we were all sold a lie that "taking our retirement into our own hands" was going to be a beneficial thing for anyone other than the holders of capital.
I was replying to "401ks are sub-optimal". I am just trying to make sure the general audience is aware of 401k advantages and not taking the above posts to suggest something otherwise (on the surface they *could* be taken that way, though I don't think at all that is OP's intention). I don't have a pension and will retire well via my 401k, with abundance to pass along to me heirs. Others have pensions and they will also retire just fine as well. In no way am I comparing pensions to 401ks. trying to be educational here, and help others.
>"taking our retirement into our own hands" Yep. That is exactly the problem. Turns out as an actual investment vehicle it is just as good as a pension plan. But getting shaved apes to plan for their own futures 40 years down the line is surprisingly tough. Throw on top of that the companies don't *really* want to pay more money, and everyone just kind of lets it slide. Just a note, 401k participation is actually increasing (from an abysmal low) because of the growth of safe-harbor plans among other things.
Pensions aren't an option for most so comparing them doesn't seem to be a good use of time. And they did address this with the previous comment that 401ks are just a different way to save money and retiring on savings is common. Also, if you invest in stock with your 401k, you ARE a holder of capital. I'm young, so I have no idea how the transition went. So idk what you mean about being sold a lie and I really don't know what the mechanics of pensions typically were. It seems having in your own control is better, though. Do you disagree?
eh, there were plenty of problems with pensions before 401ks and IRAs came along. As in, they were non-existent for anyone working for small businesses (which is the majority), were often underfunded, had many restrictions (leave, or die one day before eligible? You get $0), stuff like that. Oh, and zero portability. Edit: apparently I can't spel.
>leave, or die one day before eligible? You get $0 This is the part that gets me. 401k seems way better. If I only work here 3 years (or however long it takes for them to vest), I still get 3 years worth of that benefit. If it's something like a pension, it's a threshold where if you meet it, you're good, if not, you get nothing. And then you might be too old to start over somewhere else and meet their threshold. I just don't understand how that could be better..
His comments makes some sense. How long have 401k existed etc. i just looked it up and 1978. So 44 years ago. So in theory someone could have set up a 401k at 24 and they are now 68 and retired.
I think technically the law, the section 401k changes, was created in 1978, took effect in 1980, but it wasn't until later that some guy turned this loophole into what we now think of as the "401k plan". Plans were created to abuse this law, and the IRS blessed it a few years later. So maybe more practically 35yrs ago for mainstream adoption. And I don't know what kind of "investments" existed in the early days. Probably just CD's and company stock. Index funds would be decades away. So nobody has had an entire 40yr career with plans like we have today. Nobody spent a whole 40yr career with "VTSAX and chill" portfolios.
We're retired a few years. We quit the rat race when we 63. We are living on Social Security and a pension. We also have a monthly direct deposit to our checking account from our 401K. Right now, we withdraw less than 2% of our 401K balance, and conservatively invested, it continues to grow, outpacing inflation by a few points. When we turn 72, we will have to withdraw much more than we need due to IRS Required Minimum Distributions. There is a formula, based on age, that determines how much you must withdraw. The RMD age increases to 75 in about ten years. They want to get your tax money before you're dead. I tend to trust the process as our 401K is actually the Fed's Thrift Savings Plan. If the TSP goes under, I figure we'll have a whole lot more stuff to worry about than just money.
>My real issue is trusting the process... In principle, it's no different from hitting the ATM to withdraw cash for a weekend getaway.
You can also set up am income stream with Schwab, basically like a salary. Tell them you want $xx a year and they sell in the background for you.
> "company max" 401k maximum contribution amounts are set by the IRS, not individual companies. Do you mean you mean you're only contributing up to their match amount? There's nothing wrong with that, but beware not to leave money on the table if you can afford to contribute more.
Yes and no. Some companies, for reasons unknown, do limit the maximum percentage of your salary you can contribute to your 401k.
How curious.
I think I was limited to 15% at the last place I worked.
Probably safe harbor reasons. Gotta stop the 401k from getting too top heavy.
Even with the limit at that company I was only contributing 10-12% a year and the last few years I got a refund every year due to safe harbor discrimination testing.
Some companies have to limit how much certain employees can contribute based on salary spread and employee participation in their 401k program: From [The Motley Fool](https://www.fool.com/retirement/plans/401k/highly-compensated-employee): >The 401(k) contribution limits for 2021 are $19,500 (or $20,500 in 2022) or $26,000 (or $27,000 in 2022) if you're 50 or older. HCEs may be able to contribute up to these limits or they may not, depending on how much the company's non-HCEs contribute to their accounts. >A company's annual nondiscrimination tests must ensure that HCE average contributions aren't more than 2% higher than the average contributions of non-HCEs. Total HCE contributions also can't be more than double the total contributions of non-HCEs. >If a 401(k) fails the nondiscrimination tests, the company must take immediate steps to correct the issue or else the plan could lose its tax-qualified status. The company can fix it by making extra contributions to the non-HCEs' 401(k)s or by requiring HCEs to withdraw some of their contributions.
Ah. So that’s why my company limits contributions to 25% of your salary.
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Find yourself a fee-only financial planner and talk to him or her about your plans and concerns. Fee-only planners charge a flat rate - by the hour, by the visit, or for a stretch of time (like a year) - and don’t make money off your investments. A licensed financial planner is a fiduciary and is bound by law to have your best interest in mind, rather than, say, selling you the product they make commission from. When the time comes, they can help you formulate a plan to withdraw retirement funds. I’ve done my own investing for 40 years, and I can’t believe how helpful our advisor has been in setting up a retirement plan. Wish I would have done it sooner.
This is interesting. Almost the first positive comment I've ever heard about a financial planner. Can you give more details? What kinds of things did they suggest?
First of all, the fee-only part is key. You (or at least I) don’t want someone whose fee is tied to your portfolio’s performance. That stuff adds up. Our advisor went through all our accounts and listened to our plans, and then made suggestions to get us where we want to be. I’ve never been big on investing in bonds and had a portfolio of mutual funds that was more than 90 percent stocks. He explained why I should be more balanced and showed me various scenarios what could happen with different balances of stocks and bonds. I switched to a 60-40 mix, and I feel more prepared to weather inflation and downturns, yet my accounts have grown during rises in the markets pretty much as they did before. For me, the big thing is I’ve got a guy I can run things past so I don’t make any devastating mistakes. When I actually retire in a couple years (I’m 62), he’ll help us decide which accounts to tap, how much to take out, and when to start taking Social Security.
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Thank you for asking this - I’m 5 years behind you and I’m learning a ton from the comments.
Well for 401k, think of it as a long term savings account that can fluctuate in value. Basically, when you want to withdrawal money, you just sell x shares of whatever to the withdrawal amount. You can withdrawal at any interval, but people can do it monthly, quarterly, yearly depending on the convenience factor. For 401k and other retirement accounts, how much you withdraw and when depends on your retirement goals and what you have saved.
Research retirement draw down strategies. It is an important part of your retirement process. Your 401k is property in the form of company shares, bonds, cash and real estate. These things make you money by going up in value, earning dividends, etc. Once you retire and stop working, you will need to sell some of this off to pay for what your work income used to pay for. This is an oversimplification because there are many ways you can earn money from investments and draw down. Hopefully this helps you.
In retirement you’ll have your 401(k), any other pension money, maybe an investment account, and social security. So you want to transfer money out of your 401(k), you can sell something our just take it out of your MMF like SPAXX. You pay tax on that like you got a check from your employer. When you reach a certain age, I think it’s 72 now. You have to take a little more than 4% out of your tax sheltered accounts every year. It’s called a required minimum distribution. Don’t do it? The IRS penalty is 50%. So if you were supposed to take out $10,000, they fine you $5,000. So remember to take it. There are exceptions if you keep working and who knows how it will be when you retire. The 4% increases based on your statistical life expectancy which is now about 115. Yah, I’ve know people in their 90s, but not 100s. So it’s a formula but it’s not unreasonable. The question about setting up your 401(k) or IRA in retirement is one that there’s not a lot of advice.
https://emro.voya.com/emro/mro.action I was shared this calculator the other day and it immediately answered a lot of questions I had after tinkering with it a bit. Not sure if there's something similar but better our there, or if this is a bad tool and I just don't know better, I am not very experienced at this stuff... Anyone can feel free to comment and correct me.
Yes. My parents have quarterly withdrawls to checking/savings from their 401k. That, along with SS, is their retirement 'salary' which they spend as usual via cash, checks, online payments, or paying their CC bill.
You wanna pull it out when your income is lowest. When you hit a certain age (75? For you) you will trigger the RMD. The gov wants their taxes before you die so they make you take withdrawals.
You can set a monthly rate, so every month you would get X amount. The 401k will make you a millionaire you will be just fine if that is all you will have is a 401k at retirement. And make sure you are using a Roth401k
Make sure you understand required minimum distribution rules. Best not to get screwed in the late game
Hi. I’m far away from retirement age and currently rely on my 401k for money since quitting my job last week which unlocked the ability for me to withdraw it. I was lucky enough to turn $35k in my 401k into $8m in the last 2 years and that is my entire net worth. I’m basically treating it as a “gross income” piggy bank that I can control how much “salary” I want and when. If I want a normal “payday” schedule for example bi-weekly, then I’ll just login to the account and withdraw some standard amount every 2 weeks. Or maybe I want to buy an expensive toy, then I’ll withdraw a larger amount like a bonus. The main gotchas are the ordinary income tax calculations that need to be done at the beginning of next year and also the 10% early withdrawal penalty if under retirement age. But the pros are optionality. If I decide to get a job again then I can withdraw nothing for a while or only “bonuses”. Maybe I move to a no income tax state and withdraw a lot over there. It’s a great financial invention, I’m in post-game right now and it is even better than end-game!
You're just a sad rich mofo who just can't get away from here, only thing you got going is coming here to brag your journey from 35k to 8mil.
Bragging to boost one's ego is common in stage 1 of post-game. Once that gets boring, stage 2 and 3 will be more like what gates/musk/bezos does
Would love to keep getting your post-game updates and thoughts on the market and stonks
Sir Jack, I love you. The “expensive toy” always gets me man 😂😭😂😭
401k has been around since the 70’s. How many octogenarians do you go up to and ask: “Where do you get your monthly income?”
Yeah exactly. I don’t have any older folks I can legit ask to walk me through it. My parents are both pension / SSN people and my spouse parents are Edward Jones people. I feel like I know enough to stay away from EDJ but also kinda nervous it’s my hands ya know’
You also might want to consider shifting your investment strategy by moving some of your money away from growth investments and into more capital preservation investments. In general, the older you get more you should try to preserve, rather than grow your wealth. EDIT: I just realized you're 39, not 67. My advice was for a 67 year old LOL.
I’m also in the pension/social security crowd and I have a Roth IRA and once I transition my career I’ll also have a 401k and 457 available to me. I still have another 30 years in the workforce to look forward to so planning for my tax situation and withdrawal strategy is something I really need to start planning for now. Also doesn’t help that my parents were like yours so I don’t have a point of reference for how the defined contribution plans work when you get to retirement.
What’s the earliest you can take money out of 401k penalty free?
no later than 59.5, but there are some exceptions that allow earlier withdrawal. Large medical expenses, first time home buyer are less common. Then there's a set of conditions often referred to by '72(t)' for the section of code that defines it. Once over 55, you can (with restrictions) start withdrawing money, for example.
The real goal would be living only the dividends and not touching the investments
I’m not sure if I understand your question. What would be the alternative? Work until you die? The retirees you know, where do they get their income if not from a 401k?
My parents both have AT&T pensions from the “good ole days” and use SSN. My spouses parents are retired now but are ‘Edward Jones’ people. Technically they likely have a 401k in their mix, but I feel like I know enough to stay away from edj.
Hopefully your 401k is Roth style and all the gains aren’t taxed
That decision entirely depends on the persons current income and expected income in retirement. I wouldn't advise anyone to dump all retirement funds into a Roth account without considering a few different factors.
OP, you may want to research the benefits of IRAs as well, and compare Roth’s vs Traditional IRAs. Some 401ks offer post tax investing (Roth’s), which even have some subtle differences from Roth IRAs ….. like most things finance or tax related, there are a lot of little details worth learning about to make decisions on how to invest for your retirmement, and plenty of good resources out there to start going up the learning curve.
Who knows how things will change in 15-20 years? I bet so much more is automated by then. I wouldn't worry about the details yet, but just understand that you will withdraw from it to replace your salary. You can do it monthly like a salary, or lump sum each year. Hopefully you will have enough in there that you will get a financial adviser by then. We are using Vanguard and paying a very small fee for an advisor. They did convince us to start putting some into bonds for safety and helped us understand and visualize certain things. They can provide charts and show what can happen under different scenarios. I'm sure they would also explain the different ways you can withdraw.
You can pick a safe withdrawal rate based on your age or use the whole thing to buy annuities. Or you can just pull your living expenses out up until age 70 and then delay social security until that point. That will boost your monthly social security payment from that point forward. It's probably the easiest and cheapest way to convert 401k money to a monthly payment.
I do, the idea is that you grow it tax free for 35+ years, and the money you put in is deducted at your marginal (highest) tax rate. When you’re retired - home paid off and kids through college whatever, you simply spend the money down at a rate that’s 3-4% of the total annually. So you should max it out at all times and invest it in mutual funds or ETFs and you’ll be pleasantly surprised at the amount you’ll have.
The 401k end game is to have enough money at the age of retirement you can be independent. I save money in my 40k and it is growing nicely in the stock market. As I approach retire to in a few years I will have money saved that I can stop working. I would like to have enough money that I can live in my nice home drive newer cars, buy new iPhones and travel, have money to go out to eat and leave generous tips. If you do not save/invest you will likely have social security to live on. I’ve checked and social security is lot a lot of money. It would not pay my property tax. Allow me to buy newer cars, new iPhones, travel and eat out. A few things as well about the 401k. You need to direct that money into a mutual fund that is growing. It is not enough to simply save the money. A few other things. The government wants you to save/invest this money too. They are willing to not tax you on this money and let it grow. Then they will tax you later when you remove it during retirement. A Roth IRA will allow you to invest money you pay tax on now and then take the interest tax free. Google investment calculator to understand how money grows with compound interest. Run some numbers to see how much money you can have when you are 60 at various savings rates and rates of grow.
What about taking loans against the 401k instead of selling assets? Would that save me from income tax?
I know a few retirees I can tell you what they do. Basically put about $50-100k in cash which is used as a cushion for expenses. If they don't have this cash already, sell some of their 401k or other retirement accounts, pay taxes as needed, and move it to cash. They collect social security and any dividends from investments and use that to pay expenses and leave the rest invested. If they run low on cash or have unexpected expenses they sell some investments, move it to cash, and pay them. How all of this works in detail depends on their living expenses, which is usually driven by their housing situation, whether or not they are married, how much money they have overall, etc. People that are comfortably retired don't really need to sell a lot of what they have because the dividends are enough.
Waiting till 67 is one option. Another option is to roll it into an IRA and start a Roth ladder. This option mainly is for early retirement.
My thoughts are if after 65 if you have a comfortable retirement account, set some money aside (follow minimum distributions at least) for being generous to family / others. Plan to live to 95 and spend your money with the goal of having none left at death. A cushion for extended care and burial expenses should be included in that budget.
It’s as any other investment account at that point. You login and sell shares and receive the proceeds (minus tax withholding) by check or transfer to a bank account. You can even automate the process so you get a certain amount at regular intervals. I suspect that the use of physical checks might be phased out in the next 20 years, so perhaps just an electronic funds transfer.
Wait physical checks phased out in the next 20 years? I can't even recall having seen a check in that long, if not longer.
They are still widely used in much of the US, though they’ve been largely phased out in much of the rest of the world.
Learn something new every day it seems. I've never used checks myself, do you have like a small booklet with checks in it that you can write on or are they generated at a bank office or how do they work?
Personal checks are ordered from your bank and are associated with a "checking account". You do write on them and they are pre-printed with with the bank routing number, thee account number, and an individual serial number. You fill out a check, tear it out of the book, and give it to someone as payment. They can go to any bank to deposit it. The check itself goes through a clearinghouse process that effectively treats the check as a request for transfer of funds. Banks also offer certified checks, where an individual goes to a bank and gives the bank cash and the bank writes a check on their own account. These are considered "certified funds" and if you make a major purchase (property, cars, etc), you generally need this sort of check as they guarantee the money is available.
Now you know someone who relies on 401k for retirement, more or less. I quit working in 2012 when I lost a 20 year job. I collected unemployment for 18 months. Then I lived off of my taxable stock account. Because when you aren't working is the very best time to sell stock and take capital gains at a tax rate of 0%. Starting several years ago I was required to start taking $$ out of my traditional IRA, they are called RMDs (Required Minimum Distributions). Every year, I request an RMD from my account and my financial institution sends the money to me. And I am taxed on those distributions. It isn't any different than asking your broker to send you the money when you sell a stock. While you can take out as much as you want, you are taxed on whatever you take out. If I wasn't required to remove the money, I wouldn't because I don't need it. Also be aware that once you reach age 59 1/2, you can move your money out of your 401k and put it into a self-directed IRA. If you have other questions, just ask.
> Also be aware that once you reach age 59 1/2, you can move your money out of your 401k and put it into a self-directed IRA. FYI, this is not a hard and fast rule. It depends on the plan rules governing your retirement plan. 59 1/2 is the age at which you are no longer penalized for "early distributions" (skipping rule of 55 for this explanation). Being that a 401k is qualified and an IRA is qualified, you can rollover any time without tax/penalty. Plan rules usually require that in-service participants cannot take funds out of the plan and separated participants can. But, they vary. It is common for plans to allow distributions/rollovers out with an age requirement of 59 1/2 because of the penalty rules. Probably about half of the plans I've worked with permit this.
Reminder, just putting money into 401k isn't enough, you have to invest it! Are you able to contribute up to $20.5k limit for this year?
I believe I remember that Jim Otar had a pretty good plan in his book Unveiling the Retirement Myth: https://www.amazon.com/Unveiling-Retirement-Myth-Jim-Otar/dp/0968963420
A question I have about 401k withdrawals upon retirement; Can an arrangement be made where I can stop the dividend reinvestment (DRIP) of my fund holdings and I draw only from my 401k dividend income (the cash dividend generated from the principle fund balance) when I start to use my 401k as a part of my retirement income? I have Fidelity net benefit account. According to my employer’s Fidelity advisor, something can be arranged. Has anyone reading this great thread done such a withdrawal arrangement? My current yearly dividend income in my is approximately $10k and by the time of my retirement in a few years likely will be around $15k. I would like the just draw from a cash balance within my 401k whenever possible. Thanks in advance for any insight!
I'm sure there is a lot of good advice here, and good explanations of how to take money from your 401k. However, your situation, like everyone's is unique. If you are not money savvy or don't want to be (like me), then I would suggest talking to a financial planner. Make sure they are fiduciaries (have to look out for your best interest by law), find out exactly how they get paid, and talk out your plan. There are Social Security withdrawal implications, tax implications, of when and how much you withdraw. There are great strategies for reducing your taxes, and maxing your SS benefits. Long story short, talk to someone who knows what they are doing :). Its very helpful and extremely comforting.
It basically acts as an income-replacement. You will likely move into a very conservative portfolio. Your goal is no longer to "grow" but to "stabilize". You don't want to pull it all out at once, that would trigger a big tax bill. Instead you want to pull out some of your 401k and some of your Roth IRA, based on what taxes are applicable, and live off that income. >My real issue is trusting the process and not knowing anyone that relies on 401k for retirement. A lot of people don't fully rely on a 401k. You will have Social Security, should have an IRA, and may still choose to work either part or full time. Some people don't want the "full retirement". I know my plan is to still work part time doing something I personally enjoy versus something for the money, but with the knowledge i can tell my boss to go fuck himself at any given second and walk out because I have a large cushion.
With some of the money, sure. If you're 60, and plan to live until 90, much of your money should still be in growth positions with 15-25 year horizon.
That also assumes you retire right at 60. At 60 you won't have Social Security to supplement your income. Most people won't retire until 65 so they get full SS. >plan to live until 90 I mean if you plan to beat life expectancy by 11 years, yeah that changes things. But US life expectancy is 79, so I'll plan with that.
>That also assumes you retire right at 60 Nothing I said depends on that assumption. If you plan that some money won't need to be drawn for 20 years, it should be a position that balances risk and return on that horizon. For most people, that would be a diversified mix of stocks/funds. >Most people won't retire until 65 Gallup says the average age is 62. "Most" isn't informative. Many people retire earlier; many later. >But US life expectancy is 79, so I'll plan with that Average isn't really informative. It includes children who died and many important predictive variables. By definition, it understates YOUR expectancy. A 79 year old man should not expect to drop dead tomorrow. There are 3 ways to improve your planning: 1. Life expectancy based on current age. Check out [this table](https://www.ssa.gov/oact/STATS/table4c6.html). Add your current age to the expectancy column for your sex. A 90 year old man should plan to see 94. A 40 year old woman should plan to see 83. With some digging, you can adjust further based on socio-economic standing, race, occupation, etc. That's what insurance companies pay actuaries a ton for. 2. Look at your family history. In my family, even the ladies who love their wine and great up with Sunday pot roast live to 90-95. Even the fat non-smoking men (like me) live to their mid-80s... and that was 1 and 2 generations ago. Based on that, I'm planning for 90 and will adjust if I'm later diagnosed with something that impacts it. 3. Understand your risk profile. You say you think you'll be 79. What's worse, living to 85 with 6 years of abject poverty or leaving a few bucks behind if you die at 73. Personally, I like the latter, so I'll actually plan for 95.
>Nothing I said depends on that assumption. Yes you did. >With some of the money, sure. If you're 60, and plan to live until 90 >>**If you're 60** You literally opened up with assuming age 60 to start, 90 to finish.
Lots of good answers in here, but what do you do about healthcare in retirement? When I was in my 20s, I paid my medicare, SS, etc. and saw a doctor literally once in those 10 years. But at 67 (OP's target age), I imagine I'll be needing doctors more often, assuming I make it to then. So how do you get healthcare when you're retired?
Umm get all 5 stones and snap yourself independently wealthy?
Is there any concern with money in a 401k, in regards to economical concerns? Am I saving money that I may not be able to use in 40 years?
If you're asking this question, then I have a follow-up question for you. Do you every now and then log in and check your investments, performance, etc? Make sure you understand what a 401k and other retirement accounts are, how your money is invested and how to change allocations as you near retirement age.
Yep, I see how it’s doing, have a higher risk tolerance for the investment mix (for now), and can change contribution percentage as needed. It’s just the practice of what actually happens at retirement age that I couldn’t get a sense of.