I am a retired 64-year-old with about $490k in a 401k. It seems like all the information, tips, strategies, etc. that I find on the subject are directed at folks for whom retirement is years (if not decades) away. In any case, the advice seems to always be geared toward future growth and planning. Well the future is here now for me. I'm there already and want to start using and enjoying some of this money. I am fortunately blessed with a generous pension which I live on and a bit more is on the way whenever I decide to start taking SS. We've sold some properties in the last couple of years and thus have a good amount of cash. In other words, I do no need the 401k money to live on.
It's not that it's burning a hole in my pocket or that I want to just blow it all in a crazy shopping spree. But what's the point of growing money if you never spend any of it? I've been thinking about perhaps using some of it to pay cash for a house somewhere away from the People's Republic of California or, who knows, maybe spring for a new Tesla. Why not? Also, I'm afraid of what may happen when this record bull market finally "corrects". What will I be left with if the market tanks?
My questions: What's the best strategy for withdrawing some (or all) of this money while minimizing the tax hit? Also, what would be the best way to protect it from market swings?
Congrats, Vernon! You are where so many on here strive to be!
If it were me, and I did when I left my last job 16 years ago, I'd transfer my old 401 to a traditional IRA. There you'll have 10,000 options instead of 5. I have mine in Fidelity and Vanguard no load, no fees and I can trade stocks & ETFs cheaply if I want.
At Dow 26,000 I'd be dollar cost averaging out of equities honestly. Where do we think it's going to go? Stay out of bonds in a rising rate environment, but get chunks out of mutual funds/equities for sure.
I'd convert to a Roth or withdraw more during lower income years if I could. My income swings wildly only having passive income and sales in this frothy market. On down years, I convert to a Roth up to the next bracket. Play what-if at EOY.
As far what to do with it? I'd get a nice car if you don't have one for sure. After years of driving clunkers I bought one for cash this spring. Fun stuff!
If you like RE, get some of that. NNN commercial, self-storage or regular resi tenants. You could also look into SDIRAs if you'd like to lend or flip, but I wouldn't hold inside one. No depreciation and too many rules.
Anyway, good luck. Nice to see a retiree on here for a change!
What you want can be so simply stated it seems like there should be a simple answer for it. Unfortunately, this is almost never the case with financial planning. People's lives are unique. Off-the-rack advice might work, but it does more harm than good often enough that I no longer engage in it.
Absent any other information I would be planning for you to need money for another 30+ years. How your 401K fits into meeting your financial objectives during that time would depend on a wide variety of variables. Planning with a trained and objective third party might be beneficial in maximizing the efficient and effective use of your money.
To paraphrase Eisenhower: A plan is nearly worthless, but the planning process is invaluable.
Have fun in your retirement!
Low-cost index funds in your desired asset allocation.
4% withdrawal rate.
Do you have any heirs?
Congratulations on your retirement. I definitely think you should enjoy your money as well. I would think about the things that make you happy. Think about what you’d like your asset allocation to be. Roll your funds over to an ira like mentioned (vanguard, fidelity or Schwab). I choose no load index funds. I’ll be moving my stuff to vanguard when my time comes. If you don’t have to rely on the 401k funds, consider doing a Roth conversion ladder (search mad fientist Roth conversion). This will cut down on minimum required distributions when your 70 1/2.
I would seek out a fee only advisor that you pay upfront for guidance. Not an advisor that will make money off your investments.
Just some things I’m going to consider when my time comes.
Congrats Vernon, I tend to side with @Paul Allen more so on this topic. It's all about personal choice here. However, your question was about minimizing tax hit and protecting it from market swings.
Minimize tax, I would explore the Roth conversion ladder as mentioned from @jeremylohman
Next, protecting from market swings, I would simply take your money out of the market. If you think the market is going to correct itself then take it out. You can obviously earn money through different options with just as good, if not better ROI. One example and there are many, would be a private money lender with a first lien position. This offers passivity and an ROI that is very respectable.
Lastly, if you need help spending your money, I'm pretty good at it! Best wishes!
Thank you all for your wonderful advice. You have given me a lot to ponder/investigate. I should point out that I am extremely "challenged" when it comes to intricate investment/financial knowledge.
Steve Vaughn said: "At Dow 26,000 I'd be dollar cost averaging out of equities honestly. Where do we think it's going to go? Stay out of bonds in a rising rate environment, but get chunks out of mutual funds/equities for sure."
I'm sorry but I have no clue what most of that means. I'll look it up. I'm going to check out the Roth conversion ladder option also and look for an adviser who's not going to try to sell me something--just give me clean advice.
Aaron Wade asks:"Do you have any heirs?" Yes, I have a wife and grown daughter. They are already taken care of.
Travis Weitthoff said:"...One example and there are many, would be a private money lender with a first lien position." Another thing I'm not too clear on and will need to investigate.
Thanks again to all for your responses. They are much appreciated.
If you don't need it, leave it for your family. Use their age or ages and set one or two index target funds with Vanguard. As you know, don't worry about a hot market if the outlook is about 10 to 20 years. Are there grandkids in the horizon?
If you don't want to give the money to your family, then withdraw as much as you can, figure out a tax efficient strategy (like buying a building or starting a business) and have fun. Travel the world.
You can also start a charity or a foundation. We need more of those.
Best of luck,
Is your pension fixed throughout your life?
If it is - you should expect to be in a higher tax bracket once you start taking money out of your 401K and receiving social security.
If you are not in need of cash - You may want to consider delay receiving social security. The more you delay - the more money you will receive annually.
Also - it should be noted that once you reach the age of 70 1/2 - you will be required to take 'RMD's"(required minimum distributions). If you want to avoid RMD's - you may want to look into converting the retirement account into a Roth IRA.
California is a high tax state. You would instantly save on taxes by moving to another state. However, not everything is done to save on taxes. if you love California - I would definitely stay within the state.
@Vernon Henry , personally I would self direct in two ways:
- Asset based lending. Becoming a hard money lender. Typical returns are 9-12% plus points if you charge them. Money stays "liquid" due to the loan maturing every 6-12 months.
- Downfalls: Must know your numbers on the asset, trust the investor, and have multiple exits if/when the market softens.
Syndications: Invest in other peoples deals, typically large apartment complexes but possible through other asset classes. You get the benefits of ownership, none of the ownership headaches, and passive income. (I say none, but problems impact returns, you just won't get a call from a tenant at 2am)
Downfalls: You have to trust the operator, the market, and understand the investment at hand.
This advice is for "protecting" your capital from market swings and growing it. I don't know about the tax implications.
My investment strategy is this:
- Asset based
- Long term debt
- Underwrite for cash flow
- Appreciation is a cherry on top
- Emerging markets
- Continuing knowledge through education
What is your tolerance for risk and how much control do you want over what you invest. If you invest in stocks you have no say so as to what the company does. Also, do you want tax free income? Also, you need to take what investments you know have. In the latest tax bill, there is a great opportunity in what is called Opportunity Zones. If handled properly you can save much on taxes.