Finance

Ask an Advisor: I’m 73 and my 401(k) is “underperforming.” Should I withdraw my funds and invest in a CD?


Ask an Advisor: I’m a 43-year-old divorced dad with $315,000 in an IRA and $90,000 in a Roth and other accounts. I max out my 401(k) limit every year. Can I retire at 57?

I’m 73 years old and my 401(k) has been underperforming over the past few years. Is it a good idea for me to withdraw money from my 401(k) plan and pay the taxes I have to pay? Anyway, eventually, then invest the rest of the money in CDs?

-Archie

Archie, your desire for stability is completely reasonable, but I would be careful not to seek it too quickly. There are some huge potential costs to what you’re talking about here that could really harm your ability to support your retirement needs.

Instead, I would encourage you to find a balance that allows you to achieve the best results. This is my idea. (If you need help with retirement planning, consider contacting financial consultant.)

tax costs are real

While it’s true that you’ll end up paying taxes on the money, there are two main reasons why it could hurt you.

First, we have a progressive tax laws As your income increases, your tax bracket will rise. If you withdraw your entire 401(k) in one year, a large portion of that balance may be taxed at the highest rate. If you spread those withdrawals over several years, more of the tax will be taxed at a lower rate and you’ll be able to keep more of it for yourself.

Second, your 401(k) provides tax-deferred growth.This allows your money to grow faster in a 401(k) than in a taxable account such as certificate of deposit (CD), which requires you to pay taxes on your income each year.

In other words, taking a tax hit now could significantly reduce the likelihood that your money will stick around when you need it.

That being said, you can certainly balance the security you seek with the growth and tax benefits a 401(k) provides. (If you have other retirement-related questions, this tool can help you match potential financial advisor.)

Maintain large cash reserves

Many retirees find it useful and reassuring to keep a large cash reserve separate from their investment portfolio. A cash reserve equal to one to three years of expenses is usually a wise move.

This money can be kept in some combination of checking accounts, savings accounts, and certificates of deposit to keep it safe while also earning some interest. You can replenish this money with tax-efficient withdrawals from your account every 6 to 12 months. 401(k) or other retirement account.

This strategy allows you to reap the long-term benefits of your investment while also knowing that you have enough safe funds to cover all your needs. (If you need assistance spreading your assets among different accounts, Consider talking to a financial advisor.)

Implement efficient investment strategies

A retired man is checking his investmentsA retired man is checking his investments

A retired man is checking his investments

Although CDs are attractive, the reality is that they do not provide effective diversification for long-term growth. portfolio can provide. And that growth is key to ensuring your money lasts as long as you need it.

For example, while CD interest rates are currently relatively high, the average interest rate on one-year CDs has declined. The fluctuation range is 0.14% to 1.72% Since 2021, the Vanguard LifeStrategy Moderate Growth Fund (VSMGX) has maintained a stable asset allocation of 60% stocks and 40% bonds, with a three-year return of 5.12% as of July 21, 2023.

If I were you, in addition to the cash reserve strategy above, I would simply make sure your 401(k) is properly invested.This means you have the right Asset Allocation You are doing it with a simple but diverse collection index fund.

If you are unable to do this within a 401(k), you may consider Deposit the money into an IRADoing so preserves all the tax benefits of your 401(k) while giving you more control over how you invest. (If you need help planning your retirement account management or completing a rollover, Consider working with a financial advisor.)

bottom line

old woman at homeold woman at home

old woman at home

When you’re worried about underperformance in your 401(k) but want a secure source of retirement income through CDs, there are several factors to consider. Rolling your entire 401(k) balance into a CD may push your income into a higher tax bracket. Remember, too, that 401(k) funds grow tax-free. Consider keeping one to three years of expenses in cash. Make sure your 401(k) assets match your goals. If not, you may need to roll it over to an IRA you control.

Again, your desire for stability is completely reasonable. It’s difficult to navigate the ups and downs of the stock market when you’re retired and relying on that money to meet your needs. But there is a way to achieve this without paying excessive taxes or sacrificing the growth that a good investment plan can provide. If you can implement some version of the above plan, you should be in good shape.

Tips for finding a financial advisor

  • It’s not hard to find a financial advisor if you don’t already have one. SmartAsset’s free tools You are matched with up to three vetted financial advisors serving your area, and you can be paired with your advisor for a free introductory call to determine which one you think is the best fit for you. If you’re ready to find an advisor who can help you achieve your financial goals, start now.

Matt Bakerr, CFP® is a SmartAsset financial planning columnist who answers readers’ questions on personal finance and tax topics. Have a question you’d like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.

Please note that Matt is not a participant in the SmartAdvisor Match platform and has received compensation for this article.

Image source: ©iStock.com/Szepy, ©iStock.com/monkeybusinessimages

post Ask an Advisor: I’m 73 and my 401(k) is “underperforming.” Should I withdraw my funds and invest in a CD? first appeared in SmartReads for SmartAsset.



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