When we talk about financing their golden years, most Americans depend largely on their 401(k) retirement accounts to achieve it, but for Therese R., a 67-year-old retiree, that widely accepted wisdom did not exactly go away, in fact, she how much she regrets having invested so much money in her 401(k).
“First, I have to say: I am incredibly fortunate that years of diligent 401(k) savings allowed me to retire comfortably,” the Phoenix resident said. ”But I wish I hadn’t put so many eggs in that basket,” Therese said, having the largest portion of her net worth invested in a 401(k) plan has some major disadvantages that she didn’t realize when she was younger.
Penalty Taxes Affect Withdrawals From My 401(k)
“All the money I withdraw is affected by paying ordinary income tax rates,“ he said. ”When you’re retired, even slightly higher tax rates can add up to thousands of dollars lost every year.”
Therese made an estimate that she currently loses about 25% of each 401(k) distribution due to federal and state taxes, that is an important part of her income that she counted on after decades of contributing to those accounts.
Mandatory withdrawals according to Uncle Sam’s schedule
Another drawback that Therese has encountered, is the lack of flexibility in when she will be able to access her funds once she reaches her 72nd birthday.
“I have to start making mandatory minimum withdrawals from my 401(k) accounts, whether I need that money or not,” she said. “It would have been nice to leave more funds intact for a while to keep compounding.”
But what is stipulated in the IRS rules, retirees must start depleting their tax-advantaged retirement accounts on a rigid schedule, at the age of 70. Not doing so results in heavy penalties.
Access constraints during unstable markets
Throughout the intense volatility of the stock market, Therese also learned the hard way the restrictions in place for accessing 401(k) funds.
“Because most of my net worth is tied up in my 401(k), there have been times when the markets were down where I couldn’t access that money as easily as I would like,” he said. “With more diversification among brokerage accounts, I would have greater liquidity.”
Although they offer enormous tax advantages over the years of accumulation, 401(k)s have many rules about distributions in the retirement period that have been enlightening experiences for Therese. “I’m not saying that investing in the 401(k) plan is wrong in any way,” he said, “but I wish I had invested more in regular brokerage accounts and rental properties as a hedge.”
Diversifying sources of income in retirement
Therese admits the incredible value her 401(k) accounts have provided her in retirement, but she takes a look back and would have invested less aggressively and invested more in alternative income streams to supplement them.
“My advice to people younger than me would be to keep taking advantage of 401(k)s and free money from any employer,” he said, “but I would also spread that money more into a Roth IRA, a taxable brokerage account and rental properties, if possible.”