Let’s start with some good news. The average American's 401(k) balance has never been higher.
According to a recent Fidelity Investments quarterly analysis, the average balance in its 401(k) accounts grew to $97,700, a 9.7 percent increase from the same point last year when the average balance was $89,100.
But that good news is tempered by a piece of bad news. Most people still won’t have enough money to cover their costs in retirement – especially if they don’t have an employer pension or some other guaranteed income source to add to their Social Security benefits.
Experts mostly agree that you’ll need about 80 percent of your pre-retirement salary to maintain the lifestyle you hope to have in retirement. Social Security is meant to replace about 40 percent of your income. The rest has to come from other sources – and for many Americans the only other source is their 401(k).
Yet many treat that account as an afterthought.
How come? One significant reason is those automatic payroll deductions. Yes, they help savers build a nest egg, but people tend not to pay much heed to how the money is handled or what kind of fees they’re paying.
That’s a mistake any time, but in retirement that inattention could cost you dearly.
Retirees and soon-to-be-retirees need to become proactive about managing their workplace accounts, including dealing with these challenges:
- Taxes: Savers often look at the total balance in their 401(k) and think that’s the amount they will have to help cover their living expenses in retirement. They fail to account for one key point: They will have to pay taxes on that money when they make withdrawals. Not understanding the impact of taxes is one of the biggest errors retirees make. Before you do anything with the money in your 401(k), make sure your financial advisor or CPA clearly explains the tax impact to your overall retirement plan.
- Investment choices and flexibility: Your old 401(k) likely has limited investment options compared with a traditional or Roth IRA, so a rollover may be a good idea if you want more control over your choices. A good advisor can walk you through the pros and cons of choosing a rollover vs. sticking with your 401(k), including costs, access, consolidating accounts and creditor protection.
- Getting help: In the accumulation phase of your investment life, you may have gotten by without much professional advice. You just kept stashing money away, watching the total grow while you went about living your life. But in retirement you can’t afford such a laissez faire approach. You’ll benefit from working with a retirement specialist who can provide you with a blueprint that covers everything from budgeting to long-term care and estate planning. You won’t get this kind of help from your 401(k) plan administrator or an investment-only advisor. This area requires special training and advanced planning skills.
No doubt you’re looking forward to kicking back and enjoying a relaxing retirement, free of the everyday worries you had when you were working. But when your paycheck stops it’s crucial that you have enough income to last the rest of your life. And that takes effort.
Peter J. D’Arruda is the president and founding principal of North Carolina-based Capital Financial & Insurance LLC (www.capitalfinancialusa.com), and president of the International Association of Registered Financial Consultants. Known as “Coach Pete,” he has authored six books on finance, including his most recent, “7 Baby Steps to a Ridiculously Reliable Retirement Income.” He also hosts the nationally syndicated “Financial Safari” radio program.
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