Does your 401(k) balance have you thinking about retirement?
Times have been good
- The stock market has moved upwards for the better part of a decade. The S&P 500 is up around 378% during this time.
- Thanks to rising markets and workplace savings, 401(k) millionaires are at an all-time high.
- The fear that was present in 2008/2009 has swung to greed in 2019/2020.
History tells us it can't last forever
- Since 1980 the S&P 500 has had negative returns in 10 of 40 years or 25% of the time.
- The average intra-year drop is 13.8%
Here's what I've been noticing
- Many pre-retiree clients have come to our firm with at least 90% of their investable assets in their retirement plans.
- The last decade has been good for 401(k) participants. However, few people have rebalanced their accounts during this time. At age 50 they may have set a target allocation of 60% stocks and 40% fixed income. Now after years of market growth the allocations have been skewed heavily towards stocks. A lot of prospective clients I've seen at age 60 are closer to 80% in stocks with only 20% in fixed income.
- Seeking to reduce current taxes, many participants continue to prefer the traditional, tax-deferred 401(k) model. With little savings outside of their 401(k) accounts and no allocation to tax-exempt sources such as Roth IRAs their spending needs in retirement will need to be met by the 401(k)s.
- Participants often fail to account for the taxes due on withdrawals from their 401(k)s. In reality account balances should be reduced by 20% or more to account for the income taxes due upon distribution.
- With higher equity allocations they are exposed to substantial market risk should they retire at the start of a bear market.
What should a pre-retiree do?
- In the early 2000's the stock market was down for 3 straight years. The worst part of the Great Recession lasted about three years. As such, consider putting three years of living expenses in a high-quality short-term bond fund. If you'll need $50,000 a year from your portfolio in retirement that would mean moving $150,000 of your 401(k) assets into a short-term fund. If the market goes down significantly you won't be forced to sell investments at an inopportune time.
- If you still have a few years left working and your employer offers the option, move at least some of your 401(k) deferrals into a Roth option. This will diversify you by tax buckets and give you more options in retirement.
- Build up your cash cushion in your savings accounts outside your retirement accounts. Keep an emergency fund liquid in a high-yield savings account. Try to keep a year's worth of living expenses there.
- Consider taking Social Security early. If you stop working and the market has a few bad years it is tough to adjust with no income coming in. Collecting Social Security early would provide some cash flow which would allow you to not have to sell as many investments in a down market. Unsure what you'll receive from Social Security? Their website has your personalized numbers.
Contact Birch Investments for personalized recommendations
- Nothing in this blog should be considered personalized advice or recommendations. Never take advice from anyone who doesn't know your full financial situation and goals. And be sure to read our disclosures.
- We are based in Brookings, South Dakota. We are well versed in the 401(k) plans of many local employers.
- We give advice as a fee-only fiduciary. We are legally obligated to serve our client's best interests.
- If you'd like to chat about your situation please schedule a meeting with Brian Berkenhoff, CFA via the link below.
Brian Berkenhoff, CFA is a fee-only financial advisor in Brookings, SD. Serving clients locally in Brookings, Watertown, and Sioux Falls and across the country virtually. Birch Investments specializes in wealth management solutions, including financial planning and investment management.