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What to do with your 401(k) funds in retirement

Depending on how long you’ve been investing in a 401(k) plan – and how well your investments have performed – it is possible that you have accumulated a substantial amount of money. For many people, these funds must be turned into an income stream upon retirement.

There are actually several different alternatives for converting 401(k) money into income. But before committing to any particular method, it is important to understand the pros and cons, as well as any potential tax ramifications.

Retirement Income Generation Strategies

Some of the more common strategies for turning 401(k) funds into a stream of retirement income include the following:

  • Portfolio drawdown
  • Immediate annuity

Portfolio drawdown strategies include taking a certain percentage of the money in the account(s) to use for paying living expenses – either on a monthly or yearly basis – and leaving the remainder of the money intact to (ideally) replenish itself.

In the past, a “safe” withdrawal strategy was referred to as the 4% Rule because it was determined that 4% was an adequate amount to withdraw from a portfolio that contained equal parts (or somewhat equal parts) of equities and bonds.

Unfortunately, given the volatile stock market and historically low-interest rate environment of today, the 4% Rule is no longer considered a viable withdrawal strategy, as it could cause the depletion of the entire portfolio while income and assets are still needed in retirement.

An alternate option for using 401(k) funds to generate retirement income is the purchase of an immediate annuity. In fact, single premium immediate annuities, or SPIAs, are oftentimes funded with retirement plan money because income payouts begin right away (typically within 12 months of purchase).

The dollar amount of the payout that you receive from the SPIA will depend on several key variables, such as:

  • Age of the annuitant (i.e., the income recipient)
  • Gender (women have a longer life expectancy than men, so the dollar amount of payments to females will generally be less, with all other factors being equal)
  • Amount of money in the annuity contract
  • Length of the payout period

These annuities usually offer different options for income generation, which may include payments that last for a pre-set period of time, such as 10 or 20 years, or lifetime income that will continue to payout for the remainder of your lifetime – no matter how long that may be.

Knowing that you can count on a reliable, ongoing stream of cash flow on a regular basis can alleviate the worry about stock market crashes and interest rate reductions, because the payouts will continue over time. This, in turn, can allow you to spend time focusing on other, more important things like spending time with family and participating in activities that you enjoy.

Should You Roll Your 401(k) Funds into an Annuity?

While there are many advantages to rolling your 401(k) funds into an annuity, these financial vehicles are not right for everyone. So, before you make a long-term commitment to putting your retirement savings into a SPIA (or other type of annuity), it is recommended that you discuss your potential options with a retirement income specialist.

At Annuity Gator, we know annuities inside and out. Our mission is to provide education about these financial vehicles so that consumers can determine whether or not they will fit into their portfolio, based on their short and long-term financial needs and goals.

If you would like to set up a no-cost, no-obligation chat with an Annuity Gator retirement income expert, feel free to contact us via phone by calling (888) 440-2468 or via email by going to our secure online contact form. We look forward to assisting you with your future income strategies.

What to do with your 401(k) funds in retirement

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