Ask An Advisor: I’m a 43-Year-Old Divorced Dad With $315K in an IRA, $90K in a Roth and Other Accounts. I Max Out My 401(k) Each Year. Can I Retire at 57?
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I’m 73 and my 401(k) hasn’t been doing well for the last few years. Would it be a good idea for me to withdraw my money from my 401(k) and pay the tax that I will have to pay eventually anyway, and then invest the rest of my money in CDs?
-Archie
Your desire for some stability is completely reasonable Archie, but I would be careful not to move too quickly in search of it. There are some big potential costs to what you’re talking about here that could really hurt your ability to support your retirement needs.
Instead, I would encourage you to find a balance that allows you to get the best of all worlds. Here’s how I would think about it. (And if you need help with retirement planning, consider speaking with a financial advisor.)
While you’re correct that you’ll pay taxes on this money eventually, there are two main reasons that paying them all at once could hurt you.
First, we have a progressive tax code that pushes you into higher tax brackets as your income increases. If you withdraw your entire 401(k) in a single year, it’s likely that a large portion of that balance will be taxed at the highest rates. If you instead spread those withdrawals out over a number of years, more of it will be taxed at lower rates and you’ll be able to keep more of it for yourself.
Second, your 401(k) offers tax-deferred growth. This allows your money to grow faster inside a 401(k) than it would within a taxable account like a certificate of deposit (CD), which requires you to pay taxes on your earnings each year.
In other words, taking the tax hit now could significantly reduce the odds of your money lasting as long as you need it to.
With that said, you can certainly strike a balance between the safety you’re looking for and the growth and tax benefits offered by a 401(k). (And if you have other retirement-related questions, this tool can help match you with potential financial advisors.)
Many retirees find it both useful and comforting to keep a large amount of cash reserves, separate from their invested portfolio. Something in the range of one to three years worth of expenses is often a wise move.
This money could be kept in some combination of checking accounts, savings accounts and CDs that ensure its safety while also allowing it to earn some interest along the way. And you can replenish it every six to 12 months with tax-efficient withdrawals from your 401(k) or other retirement accounts.
This kind of strategy allows you to get the long-term benefits of investing while also knowing that you have plenty of safe money to cover all of your needs. (And if you need help spreading your assets across different accounts, consider speaking with a financial advisor.)
A retired man going over his investments
As appealing as CDs can be, the reality is that they do not provide the long-term growth that an efficiently diversified investment portfolio can provide. And that growth is key to ensuring that your money lasts as long as you need it to.
For example, while CD rates are relatively high right now, average rates on a one-year CD have fluctuated between 0.14% and 1.72% since 2021. In comparison, the Vanguard LifeStrategy Moderate Growth Fund (VSMGX), which maintains a steady asset allocation of 60% stocks and 40% bonds, has a three-year return of 5.12% as of July 21, 2023.
If I were you, in addition to the cash reserves strategy above, I would simply make sure that your 401(k) is properly invested. That means that you have the right asset allocation and you are implementing it with a simple but diversified collection of index funds.
If you can’t do that within your 401(k), you could consider rolling that money into an IRA. Doing so would maintain all of the tax benefits of your 401(k) while giving you more control over how you invest. (And if you need help planning your managing retirement accounts or completing a rollover, consider working with a financial advisor.)
Older woman at home
There are several factors to consider when you have concerns about a poorly performing 401(k) combined with a desire for a secure source of retirement income that a CD would provide. Moving the entire 401(k) balance into a CD could bump you up to a higher tax bracket. Remember, too, 401(k) money grows tax-free. Consider keeping one to three years of expenses in cash. Make sure your 401(k) assets align with your goals. If not, you may want to roll it over into an IRA that you control.
Again, your desire for stability is completely reasonable. It’s hard navigating the ups and downs of the stock market when you’re retired and reliant upon that money for your needs. But there’s a way to get there without overpaying in taxes or sacrificing the growth that a good investment plan offers. If you can implement some version of the plan above, you should be in good shape.
If you don’t have a financial advisor yet, finding one doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have free introductory calls with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Consider a few advisors before settling on one. It’s important to make sure you find someone you trust to manage your money. As you consider your options, these are the questions you should ask an advisor to ensure you make the right choice.
Keep an emergency fund on hand in case you run into unexpected expenses. An emergency fund should be liquid — in an account that isn’t at risk of significant fluctuation like the stock market. The tradeoff is that the value of liquid cash can be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts from these banks.
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Matt Becker, CFP®, is a SmartAsset financial planning columnist and answers reader questions on personal finance and tax topics. Got 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 SmartAsset AMP platform, is not an employee of SmartAsset, and he has been compensated for this article.
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Kaitlin Rogers is a writer, editor, and news junkie. She has been working in the media industry for over five years, and her work has appeared in dozens of publications.
Kaitlin graduated from Michigan State University with a bachelor's degree in journalism and political science.
