As the savings rate in 401(k) accounts reaches a record high despite slipping balances, pre-retirees and retirees must maximize their funds. David Montgomery, managing director of Retirement Plan Services at Concurrent, shares his expertise on turning 401(k) balances into effective retirement income.
The Importance of Professional Advice
Montgomery emphasizes the need for professional advice, stating, “It’s hard enough even for financial professionals to get it exactly right, and it’s even harder for someone not skilled in this area to get right.” Many people make the mistake of being too conservative with their investment mix, especially considering rising longevity. “The reality is that many people will live 20-30 years after they retire, so generally speaking they’ll still need a reasonable percentage of equities in their portfolio to receive the growth it needs over that time frame and not outlive their assets,” he explains.
Evaluating 401(k) Plans
As a fiduciary advisor, Montgomery has guided many clients on the benefits and risks of rolling a 401(k) into an IRA versus leaving it with a plan provider. The first question to ask is “how good is the client’s 401(k) plan?” Montgomery notes that some plans are excellent, with low-cost investments and strong fiduciary oversight, while others may be run by business owners without expertise in 401(k) plans.
Adjusting Investment Strategies
For clients 5-10 years from retirement, Montgomery recommends adjusting their investment mix to a slightly more conservative volatility level while maintaining proper equity exposure. “Depending on certain factors, around the 2-5 years from retirement mark, some clients might even consider starting to shift some of their portfolio, such as a year or two worth of expenses, into cash or very conservative bonds,” he suggests. This helps ensure that the money for their first couple of years of expenses isn’t exposed to potential large market swings downward as they’re starting to withdraw it as their retirement ‘paycheck.’
By following these strategies, retirees can make the most of their 401(k) balances and create a sustainable retirement income plan.
