by Andrea Norris-McKnight

You’ve been diligently contributing to your 401k for years. Now you want to maximize those funds in retirement. To do so, you’ll need to know what happens to your 401k when you retire.

For years, your employer has been taking part of your earnings and putting them into a 401k retirement plan. You’ve managed it and watched it grow. Now you’re nearing retirement age and wonder what happens to your 401k when you retire.

To help us understand the transition for you and your 401k plan, we spoke with Peter Weitz, a Senior Vice President and equity partner of Fusion Analytics Investment Partners. Peter focuses on corporate 401(K) and defined benefit plans, retirement planning, and wealth retention. He’s also responsible for the In Black and Weitz podcast.

Q. For years, the purpose of an employee’s 401k was to accumulate wealth. At retirement, that changes. What does that transition look like?

Mr. Weitz: We get asked this question quite often. But the real answer lies in the question we ask them: What does your retired life look like? What do you think your financial needs are going to be? Without this answer, it is almost impossible to describe and outline what the transition will look like.

Moreover, what most don’t realize is that there is an interesting shift when the accumulation spigot is turned off, but it looks different than what the mindset of a retiree thinks about. During this period of time, it becomes the most important to engage a financial professional because the math and investment selection going forward is going to help show how long the money will last into retirement.

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What we find is that retirees think that once the accumulation phase is over and they are going to start spending, that the investments are completely shut off. The reality is that money must stay invested. It’s just that the allocation may change.

I have trademarked a concept in this regard called the “Retirement Stoplight,” and as the name suggests, assets are divided into three colored buckets.

• The red light bucket is for money that I need to live on for the next 0-5 years, and as such, it cannot be subject to risk, so it is invested similarly as you think about a red light on the street. You stop.
• Yellow light money is money that a client doesn’t necessarily need until years 6-10 of retirement, so I can invest it in the markets, but as the yellow light suggests, I need to proceed with caution.
• Green light money has a minimum of a 10 year time horizon before the client needs to use it, so as that color suggests it is “go time.”

The point here is this: just because you are retired and are not accumulating any longer does not mean that you can sit idle.

With the life expectancy continuing to increase, our job as professionals is to figure out ways to make the money last. By having a systematic investment “policy” along with disciplined spending, it will allow us to build a long term plan that will provide for clients as they live well into their retirement.

Q. Does the investment portfolio change dramatically at this time?

Mr. Weitz: The answer to this question is going to rest largely on the questions we pose to the client: What does your retired life look like? What do you think your financial needs are going to be?

The more money required in retirement, the more return might be necessary to sustain that level of income in retirement. The portfolio design is merely a solution to the answers to the questions.

Q. What should you consider when you decide whether to leave money in the 401k, roll it into an IRA, or take a lump-sum distribution?

Mr. Weitz: Typically we find that most people don’t have just one 401k, but on average have three 401k plans from their working career. We have been big proponents of explaining to investors that out of sight is out of mind particularly when it comes to the sensitivity of investments.

As such, we like to tell our clients to consolidate their assets into one place and we are believers that an IRA is the place to do this. The IRA can offer greater financial investment options, which can be better suited for retirees, as well as, offer more customized portfolios and in most cases better financial advice or support.

Q. What’s the biggest mistake that retirees make with their 401k plans?

Mr. Weitz: One of the biggest mistakes retirees make with their 401k is taking the money out of it first, incurring taxable income, before using savings that have always been taxed. We advise our clients to make sure they use qualified money last and only take what is necessary. This included required minimum distributions so as to limit tax exposure.

The other mistake we see retirees make is that they keep their allocations of investments the same as they have always been and tend to be way too aggressive when they shouldn’t be.

Q. Most people are used to managing their 401ks without professional help. Are there certain issues that require professional advice? And, if so, what are some of them?

Mr. Weitz: Most investors don’t have the education or professional experience to be able to evaluate what is a good investment and what isn’t. Inside of a 401k plan, there could be dozens of investment options to choose from and most investors pick their options based on returns, or in most cases, expenses. While both of those are important, it is more important to understand what else is driving those two criteria.

For example, if a more expensive money manager for a given fund has outperformed a lower cost index after the expenses are paid (net of fees) then how could one argue that the active manager is more expensive? There are other issues to look at as well:

• How did the investment hold up in bad markets (think 2008)?
• How long has the manager been leading the mutual fund (tenure)?
• How does the fund compare against its benchmark?
• How does the fund compare against a similar type investment within the plan?

One of the biggest questions I always ask and look for is: does the fund manager have his own personal money in the fund? If they are not going to eat their own cooking, then something is wrong.

If these questions aren’t asked or answered or if a retiree doesn’t know to ask these and similar types of questions, then they should seek the help of a professional.

For most people, 401k savings will be a major portion of their retirement income, so managing it properly is important to your financial future.

• The Importance of Taxes and RMDs on Your Retirement Accounts
• How To Minimize 4 Risks to Your Retirement Savings
• Can I Take a Lump Sum from My 401k When I Retire?
• Managing Your 401k In Your 50s

Reviewed March 2023