If you’re a participant in a 401(k) plan, you probably signed up for your employer’s plan and continue to participate in it because of the variety of benefits available from this unique type of retirement arrangement.
- Automatic savings that might not otherwise occur
- Reduction of taxable earnings for amounts contributed to non-Roth 401(k) plan
- Sizable annual contribution limits: Up to $17,500 or $23,000 if age 50 or older
- No taxation on contributions and earnings until withdrawals are taken
- Potential employer matching of a portion of contributions
- Investment customization
- Roth IRA type tax treatment if permitted by plan
- Ability to borrow if permitted by plan
- Protection from creditors
While these are all wonderful incentives for enrolling in a 401(k) plan, it’s not enough to have, and regularly contribute to, a 401(k) plan. Keeping in mind that (a) the primary purpose of this type of plan is to save for retirement, (b) when you take distributions from your 401(k) plan they will be fully taxable with the exception of Roth contributions, and (c) the IRS requires you to take distributions from your plan beginning at age 70-1/2, it’s essential to have a retirement income plan in place for your 401(k) plan several years before you retire.
This is especially important since it’s not unusual for a 401(k) plan to grow to become an individual’s largest investment asset. As such, it has the potential to generate a substantial amount of retirement income. Despite this fact, many employees approaching retirement don’t have a retirement income plan for their 401(k) plans.
A new LIMRA Secure Retirement Institute study found that 27% of U.S. workers between age 55 and 64 don’t know how they will use their 401(k) plans after they retire. Women are less likely than men to have planned for their assets, with 38% with no plan versus 19% for men.
So why don’t people who are knocking on the retirement plan door have a retirement income planning strategy? The three most popular answers from the LIMRA study are as follows:
- 24% — Not yet close enough to retirement to create one
- 27% — Have enough income from Social Security and pensions to meet all of my household expenses
- 42% — Haven’t gotten around to making it
Ah yes, our dear friend, procrastination, is the winner.
As numerous retirees have discovered , it’s a huge mistake to forgo developing a plan for converting their investment assets, including 401(k) plans, into an income stream that combined with other sources of income, such as Social Security, will sustain them for the duration of retirement. See: Don’t Plan to Squeak By Into Retirement
With pension plans a thing of the past for most nongovernment employees, increasing life expectancies, and fewer employees funding increasing numbers of retirees’ Social Security benefits, the importance of timely retirement income planning for 401(k) plan and other retirement assets cannot be overemphasized.
According to Matthew Drinkwater, associate managing director of LIMRA SRI Research, “Ultimately, our research has shown that people who take the steps to plan for retirement are more likely to feel more confident in their ability to be financially secure throughout their retirement.”
The good news for those individuals who haven’t gotten around to developing a retirement income planning strategy but understand the importance of doing so is that there’s a growing wealth of resources available to assist them. Retirement income planning has gone well beyond traditional investment management. It has become a separate and distinct specialty for many financial professionals with its own educational and experience requirements.
Do you know how you will convert your 401(k) plan assets that you’re working hard to accumulate into a reliable stream of retirement income? It isn’t enough to have a 401(k) plan. You need to plan for your plan.
Robert Klein, CPA, PFS, CFP®, RICP®, CLTC® is the founder and president of Retirement Income Center in Newport Beach, California. Bob is also the sole proprietor of Robert Klein, CPA. Bob applies his unique background, experience, expertise, and specialization in tax-sensitive retirement income planning strategies to optimize the longevity of his clients’ after-tax retirement income and assets. He does this as an independent financial advisor using customized holistic planning solutions based on each client’s needs and personality.