You've been saving diligently for years, and now it's time to think about how to convert the money in your 401(k)s (or similar employer-sponsored plans) into retirement income. But hold on – you may need to take a few steps first.
Evaluate your needs
If you haven't done so, estimate how much income you'll need to meet your desired lifestyle in retirement. Conventional wisdom says to plan on 70% to 100% of your annual pre-retirement income; however, your specific amount will depend on your unique circumstances. First identify your non-negotiable fixed needs — such as housing, food, and medical care — to get clarity on how much it will cost to make basic ends meet. Then identify your variable wants — including travel, leisure and entertainment. Segregating your expenses into needs and wants will help you develop an income strategy to fund both.
Assess all sources of predictable income
Next, determine how much you might expect from sources of predictable income, such as Social Security and traditional pension plans.
Social Security: At your full retirement age (which varies from 66 to 67, depending on your year of birth), you'll be entitled to receive your full benefit. Although you can begin receiving reduced benefits as early as age 62, the longer you wait (up to age 70), the more you'll receive each month. You can estimate your retirement benefit by using the calculators on the SSA website, ssa.gov. You can also sign up for a my Social Security account to view your Social Security statement online.
Traditional pensions: If you will receive a traditional pension from your current or a previous employer, be sure to familiarize yourself with its features. For example, will your benefit remain steady throughout retirement or increase with inflation? Your pension will most likely be offered as either a single life or joint-and-survivor annuity. A single-life annuity provides benefits until the worker's death, while a joint-and-survivor annuity generally provides reduced benefits until the survivor's death.1
If it looks as though your Social Security and pension income will be enough to cover your fixed needs, you may be well positioned to use your other assets, like a 401(k), to fund those extra wants. On the other hand, if your predictable sources are not sufficient to cover your fixed needs, you'll need to think carefully about how to tap your employer-sponsored plan assets, as they will be a necessary component of your income.
Understand your savings plan options
A key to determining how to tap your employer-sponsored plan assets is to understand the options available to you. According to the Government Accountability Office (GAO), only about one-third of 401(k) plans offer withdrawal options, such as installment payments, systematic withdrawals, and managed payout funds.2
Various pension plans may allow you to leave the money alone or require you to take a lump-sum distribution. You may also choose to roll over the assets to an IRA, which might offer a variety of income and investment opportunities, including the purchase of annuity contracts. If you choose to work part-time in retirement, you may be allowed to roll your assets into the new employer's plan.
Determining the right way to tap your assets should take into account a number of factors, including your tax situation, whether you have other assets you'll use for income, and your desire to leave assets to heirs. A financial professional can help you understand your options.
1Current law requires married couples to choose a joint-and-survivor annuity unless the spouse waives those rights.
2401(k) Plans: DOL Could Take Steps to Improve Retirement Income Options for Plan Participants," GAO Report to Congressional Requesters, August 2016
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