I have $850k in My 401(k). What Are My Best Options for Retirement?

0 0 7 minutes read

I have 0k in My 401(k). What Are My Best Options for Retirement?

SmartAsset and Yahoo Finance LLC may earn a commission or fee by linking to the content below.

In homes with very few survivors, there is a rule book. A healthy retirement requires you to reorganize your spending habits, maximize Social Security and delay withdrawals as late as possible. For families with large savings, there is another set of rules. You want to manage your wealth, plan your estate and minimize taxes.

With $850,000 in retirement savings, a hybrid approach to retirement planning may be more effective, depending on your personal circumstances. You can’t ignore spending and taxes, or this money may not stay the same. On the other hand, you probably don’t need to cut your comfort and lifestyle to the limit. This is retirement about balance.

Say you have $850,000 in your 401(k) and you’re about to retire. What is the plan to help ensure that it lasts, while living in the most comfortable situation possible? How you manage this retirement account can make a big difference.

Here are some important things to consider. You can also use this free tool to be matched with a trusted financial advisor if you’d like to discuss your plan with a professional.

The first question here is, when do you plan to retire? This is bigger than it might seem.

One of the most underappreciated aspects of retirement planning is that the last few years of your working life are, financially, often the most important. This is the time when your retirement account has reached its maximum compounding value, meaning that each additional year of work produces more wealth over time, pending market conditions. At the same time, you are also likely to reach your peak earning years, allowing you to increase your contributions to all types of savings.

For example, let’s say you’re 67 and make $150,000 a year (twice the national median). At a 10% annual savings rate, this gives you $15,000 a year in retirement contributions. Add in the full employer match and you have $30,000 a year.

If you retire today, you will have $850,000 in your 401(k) account. However, with this profile, you can work for a while and continue to let this portfolio grow. Say he waited three more years and retired at age 70. With an 8% compounded return (typical of a bond/stock portfolio) and $30,000 a year in additional contributions, you could have $1.16 million in savings.

That is a very generous retirement plan.

The point of this is not to say that $850,000 is not enough. Rather, it is to emphasize that when you choose to retire it is important.

Social Security is the next big issue.

For most retirees, your net income is a combination of Social Security payments and portfolio withdrawals. So any plans will depend on your Social Security, and how much you need after benefits each month.

Currently, the average monthly income for a retiree is $1,907 per month, or $22,884 per year. Let’s call that your full benefit when you retire at age 67. This means that if you’re 67 today, you can count on an inflation-adjusted income of $22,884 a year for the rest of your life.

You can also choose to delay collecting your benefits, which will increase your lifetime payments by 8% per year up to a whopping 124% at age 70. This would produce a guaranteed income of $28,376 per year for life depending on how long you wait to retire.

This brings us to the crux of the matter. To determine what to do with your portfolio in retirement, we need to start by figuring out your potential retirement income. Much of that will depend on when you choose to retire and when you choose to collect Social Security benefits.

For example, let’s consider a basic bond portfolio, which many retirees choose because of their lower risk profile compared to securities (stocks). Based on averages over the past 25 years, this could produce a consistent rate of return of 5%. We will conservatively budget for retirement savings that last up to 100 years. The average life expectancy at retirement is about 87 years, but we want to account for both medical advances and going beyond the average. After all, about half of us will hit any median and we want your 95th birthday to be good news.

If you retire at age 67 with a 33-year plan, you can expect an income of:

Portfolio: $50,000 + Social Security: $22,884 = $72,884 per year

If you retire at age 70 with a 30-year plan, you can expect an income of:

Portfolio: $72,000 + Social Security: $28,376 = $100,376 per year

On the other hand, you may take a more conservative approach to retirement. Some financial advisors may suggest that retirees should invest for more growth to reduce inflation and live longer. In this case, you might invest in an 8% diversified portfolio, balancing your bonds (5% return) with the S&P 500 (11% return). Now, this approach will require greater flexibility in terms of risk. You will need the ability to adapt to the low years, either through an emergency fund or downsizing. However, in this case you can expect the following income at age 67:

Portfolio: $70,000 + Social Security: $22,884 = $92,884 per year

Now, these are just three examples. You have several options, including a traditional 4% plan (withdraw 4% of your portfolio annually) or use all your savings to buy a lifetime annuity (increasing security, but increasing inflation risk).

In all cases, however, the important question is how these numbers meet your personal needs, and how comfortable you are with risk. For example, each of the above examples would produce a comfortable income for a family living on a national income of $77,500. However, if you’re used to a $150,000 a year standard of living, you may have a hard time making this budget work.

A financial advisor can help you do comprehensive retirement calculations based on your personal circumstances.

Anticipating your needs and budget for retirement will involve many concerns.

First and foremost, of course, is your own spending. What do you need to spend each month and year to maintain your lifestyle? How does that meet your salary? If the numbers are a little off, are there parts of your lifestyle that you can fine-tune, or would it be easier to adjust your retirement plan? If the numbers are significantly off, is it possible to move to a place with a lower cost of living or make major changes?

While you’re at it, be sure to plan your taxes.

With this profile, it’s unlikely you need to worry about RMDs. Your 401(k) income withdrawal will likely exceed your minimum distribution. For example, even if you still have $850,000 in your portfolio when you are 73 years old you will only have a minimum distribution of $32,000. This is probably less than you will withdraw in a typical year.

Now, if you find that your spending is too easy, you’ll want to keep an eye on this. More or less if you see yourself withdrawing less than $40,000 a year from your 401(k), double check your distribution requirements. If not, this won’t be a problem.

Taxes, on the other hand, will be an important part of your budget.

When calculating retirement savings, it’s easy to overlook income taxes. However, without a Roth account, you will generally owe standard taxes on all pre-tax portfolios, capital gains taxes on all taxable portfolios, and modified income taxes on Social Security benefits. This can significantly reduce the amount of income you spend, especially when you factor in state and local taxes.

For example, let’s say you live in New York City. On a retirement income of $72,884 you can expect to pay about $14,089 in federal, state and city taxes combined. (This can be offset somewhat by the small break you get on Social Security taxes.) This would leave you with $58,795 in real expenses to live on.

Make sure you budget for this. Otherwise you may be in for an unpleasant surprise when your first year is out of a job. Consider talking to a financial advisor who can help you look at the many things needed to come up with a solid retirement strategy.

As you approach retirement, it’s important to start making a plan for how you’re going to turn your savings into income. This requires budgeting, planning and thinking about how and when you intend to retire.

We can’t overdo it: financial planning isn’t just about retirement. With that in mind, here are six tips for financial planning for retirees.
A financial advisor can help you create the perfect retirement plan. Finding a financial advisor doesn’t have to be difficult. SmartAsset’s free tool matches you with up to three vetted financial advisors serving your area, and you can have a free introductory call with your matching advisor to decide which one you feel is right for you. If you’re ready to find an advisor to help you reach your financial goals, get started now.
Keep an emergency fund on hand in case you run into an unexpected expense. An emergency fund should be liquid – in an account that isn’t exposed to high volatility like the stock market. The tradeoff is that the value of cash can erode due to inflation. But a high interest account allows you to earn compound interest. Compare savings accounts from these banks.
Are you a financial advisor looking to grow your business? SmartAsset AMP helps advisors connect with leads and provide automated marketing solutions so you can spend more time converting. Learn more about SmartAsset AMP.