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Question: As I get closer to retirement, the time is coming to make some vital decisions about my 401(k). I know I have multiple options. Where do I start?
Answer: As retirement day approaches, your company’s human resources department may prompt you about what to do with your retirement plan money. There is a variety of options, but until you have a clear idea on how you see yourself sailing through your retirement years, avoid making irreversible decisions.
Irreversible decisions are those that cause significant loss of your money to taxes or restrict how you can receive your money. It is not necessary to make such decisions until you are at ease and they fit nicely into your retirement plans.
A decision simply to cash out your company retirement savings probably would rob a third of it for taxes. That is because a hefty savings amount would force you into a much higher tax bracket. Delay this decision and know when you do need the cash, there are less taxing ways to access it.
Annuitizing those savings too early is an irreversible decision. Not only does it eliminate access to your principal for other options, but results in a lower monthly payout than taking it later – because of your longer life expectancy when you begin. Again, hold off until you clarify your retirement plans.
You can forestall such decisions by rolling your money directly into a new traditional IRA. Doing so will not trigger any taxation on your savings, maintains full protection against creditor claims and give you the option to invest your savings in almost any way you choose.
An IRA may allow withdrawal options for your beneficiary — should you die unexpectedly – that your company plan does not offer.
Rollover to an IRA also should not be done with haste if you have company stock in your employer plan or if you qualify for 10-year averaging.
Lastly, be sure not to rush investing your IRA money too conservatively. At 65, you have an average of 17 years of life expectancy. Half of people who reach age 65 still are alive at age 82. That’s clearly a long-term investing time during which inflation can cut into the value of your portfolio significantly.
Rushing into a too conservative portfolio balance can rob you of the growth protection that, historically, equity investing can give you over the long run. You will need that growth to increase – or at least maintain – the afte-inflation value of your portfolio. Note that no investment strategy can guarantee a hedge against inflation or profit, and investments with high return potential carry greater risk of loss.
Lay Out Your Plans.When worries of work and pressures of your imminent retirement subside, map out a reasonable course for your retirement years. Today, many people plan to phase into full-time retirement. Perhaps take a long vacation first to relax. Then try a part-time job or two to see what is enjoyable. Maybe develop a second career for a while.
It is best to try different options to help you clarify what you want to do, and what you can do. Doing so will give you a better idea of how much savings income you need to generate – and when.
Wm. Steve Wright is managing member of The Wright Legacy Group, LLC
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