Should You Keep Your 401(k) When You Retire?

Have you thought about what you will do with your 401(k) once you retire? In this episode of Retirement Roadmap, Evan and Mark Fricks unravel the complexities surrounding 401(k) and IRA options as retirement beckons. We dissect the advantages and limitations of maintaining a 401(k), from enticing company matches to frustrating investment constraints, and uncover the expansive opportunities IRAs can present, including investing in precious metals and real estate. With insightful discussions on converting traditional IRAs to Roth IRAs for potential tax-free benefits, this episode is packed with strategies that may refine your retirement savings approach for enduring financial health.

Have a topic or question you'd like Mark and Evan to address in a future episode? Email us at info@masterplanretire.com or call 770-980-9262.

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Advisory services offered through MasterPlan Retirement Consultants, Inc., a Regi

Visit masterplanretire.com to access our retirement checklists, podcasts, and schedule a complimentary consultation.
Call 770-980-9262 to speak directly with someone about your retirement planning needs.

https://masterplanretire.com/

Catch all episodes of our podcast at https://www.masterplanyourretirement.com/resources/episodes

Listen to Mark Fricks on Saturdays at 12:00 p.m. on XTRA 106.3 FM WFOM.
Sign up for one of our upcoming events at https://www.masterplanyourretirement.com/events

Purchase Mark’s book, The Road Less Traveled: Turning Your Retirement Worries Into an Excursion of a Lifetime, on Amazon: https://a.co/d/4fx94Al

Advisory services offered through MasterPlan Retirement Consultants, Inc., a Registered Investment Advisor in the state of Georgia. Insurance, tax and commodities services offered through Fricks and Associates, Inc. dba MasterPlan Retirement Consultants. The aforementioned are affiliated companies.

Transcript

Speaker 1 0:06

Hey folks, thank you for joining us. Welcome to Retirement Roadmap with Master Plan Retirement Consultants. My name is Evan and with me, as always, retirement Planner Mark Fricks. Mark, how are you today, sir Doing?

Speaker 2 0:17

real good. I'm having a good fall season here. I'm not sure when people will be watching this, but right now it's great weather moving in and leaves are changing all that kind of good stuff. Time to make a mountain trip, that's right, it's about that time.

Speaker 1 0:28

Well, if you haven't scheduled it by now, you might be out of luck. Yeah, probably so.

Speaker 1 0:31

So today we're going to be talking about 401ks and mainly, should you keep your 401k or roll it over to an IRA? So a 401k can be a great investment for retirement. It offers a host of benefits. If you contribute up to a certain amount, you're able to get the company match, which is basically free money to you. You can benefit from compound interest through market returns. It's easy to participate in long-term investment for that consistent, long-term growth Plus, some 401ks are relatively low cost for retirement savers. Your 401k options during your working years are extremely limited, especially when you are still working for an employer. But once you retire or change jobs, your options begin to expand. You can leave the 401k where it is or roll it into an IRA. So should you leave it or move it? That's the question mark when the 401ks offer so many benefits. We'll discuss why you may consider rolling your money to an IRA. We get this question a lot and it's a lot of what we do day to day as well.

Speaker 2 1:28

It really is, and we'll get into the weeds here in just a few minutes. One of the things I see about 401k you mentioned the cost not too many fees that you see, but you do have to be careful with the fees that are in the funds, right, because most 401ks are still using mutual funds. We think mutual funds are archaic and they're expensive, and so you know there are some hidden fees. You won't see as much and you don't have the cutting-edge technology or the cutting-edge investments available to you as well.

Speaker 1 1:55

But we'll get into that Well, yeah, mutual funds is a great segue into our first point. An IRA offers more investment options than a 401k, so the average 401k offers between eight and 12 investment options. Some plans may offer up to a few dozen. That'll depend on the size of the company. Of course, some have, but, however, iras, on the other hand, have thousands the world to choose from?

Speaker 2 2:20

Absolutely yeah. So you know, as, as as we talk about, sometimes, we do specialize. One of our specialties is working with federal workers and their 401k is called the Thrift Savings Plan. It has five choices, you know, and they their. Their idea was let's keep it simple, you know, and but, but again, you can't really dig into the market. And as I say many times in the classes that we teach to the federal worker is that you can actually put physical precious metals in an IRA. You can't do that with a 401k. You can put a rental house in an IRA. So if you want to talk about lots of things to choose from, we could talk for a while just about that.

Speaker 1 2:58

Yeah, absolutely. And the rental house is really interesting too, not to go off on a tangent. But I'm talking to someone right now who has a rental house and an IRA and he's considering what converting to that to a Roth would look like because, yeah, he has that rental income per month coming in through the rental property but that's taxed at his bracket being an IRA. But if he slowly starts the progress, the strategy of converting a portion of that, he could potentially have that cash income stream as a completely tax-free income.

Speaker 2 3:27

Yeah, and then when it's inherited. Of course, as we know, roths don't have a required minimum distribution while you're living. That would help them a lot. When you pass away, it does, but it's not taxable to your children, grandchildren, whoever may inherit it as well. So a lot of positives there.

Speaker 1 3:41

And 401ks are also limited in their creation of their job as well. Like we've said this before, it's got one job and that's to grow. Now maybe you have a different timeline or risk tolerance, so the way that it grows might look different than your fellow co-worker. But it's got one job is to grow. But we know in retirement we have many more needs than just asset growth. So once you get closer to retirement you start looking at more and more conservative growth models so you don't fall with the market when there's a big drop. Through an IRA you may also be able to find protected vehicles. So in a 401k maybe you get more into a cash position the closer you get to retirement. In an IRA you have a lot more options than just cash for protected growth yeah, I'm still talking about the 401k, the one job growth.

Speaker 2 4:32

So as we get nearer to retirement, we have multiple jobs. As we've talked about before you, you might need some short-term income to delay Social Security. So what, what does that vehicle look like? We don't want to take it out of a 401k because the 401ks in the Now. Can you move some of it to a stable value or a money market? Yes, and you won't keep up with inflation. So now you're limiting your income to two and a half to 3% is the money market area as well.

Speaker 2 4:59

So another job may be long-term income. Maybe at a certain age, you start having an income gap after Social Security and other income, and so that's a different looking tool as well. You can't put all these jobs. Maybe you wanna begin and I know we're gonna talk about this shortly maybe you need some of that money to become tax-free. It's built up tax deferred In retirement, fixed income. Taxes go up. You get a cut in your pay, so to speak. Right, maybe you need some short-term growth in a bucket for things you want to do in the next two years, mid-term growth for things in the next five years. So there's so many different, you know, as we've talked about our clients. Many of our clients have 6, 8, 10, 12, 15 different accounts using one or two big 401ks slicing them up so they have a function Right and it just works. It's just so much more efficient to do it that way.

Speaker 1 5:52

Yeah. The second point here is you can't convert to Roth from a 401k, and I feel like this point is looming larger and larger these days as taxes are more and more unknown. What are they going to be in the future, especially in retirement, when we're on a fixed income?

Speaker 2 6:08

So yeah, you can't convert to a Roth directly from a 401k Right and Ed Slott, a semi-famous colleague of ours. He's been on Fox News and all of the different talking shows when it comes to money and taxes, even had a class with PBS and he talks he calls an IRA, a 401k, a ticking tax time bomb. Because you're growing this money tax deferred, it's becoming larger and larger, which means more and more taxes when you do start taking money from it. So it's so critical to get some of that money into a Roth, but you can't do it, as you said, directly from a 401k and so until you can get that out of that 401k into an IRA, then you can begin having a conversion process or strategy to get some of that money into the tax-free situation.

Speaker 1 6:53

Yeah, roth conversion can make sense right now. If you believe taxes will be higher in the future and we've discussed this you want to lock in today's lower tax rates. We've had some previous episodes where we've talked about how we feel. Right now, taxes are on sale because, unless there are some changes made, taxes will be returning to their pre-2017 rates. Retirees with more saved they may want to consider a conversion now, especially since Social Security is taxable for many people age 73 and up who must take RMDs, required minimum distributions. If the money's in a Roth, it can help lower your tax burden in retirement. And there are no, as you mentioned, no RMDs on a Roth. No forced withdrawals Absolutely yeah. Number three you can get access to professional investment management and financial planning in an IRA.

Speaker 2 7:41

Yeah, so that's a lot of what we do right. We work with our clients to develop investment buckets, or whatever you want to call them that will again meet their needs for that particular bucket. But also we use what's called, as you know, actively managed accounts. So these are accounts that are tied to computer programs that have we call it rules-based investing. So the computer is reading the algorithms and trying to get ahead of the market.

Speaker 2 8:08

As opposed to what did, what did this stock do last year? I want to know what it's going to do next year. And you don't know, because maybe the company is very, very strong but maybe it's a bad economy, so this company starts losing money. But if we can get ahead of that, ahead of that curve, and as we've talked about before, these actively managed accounts are averaging based on a study from 2014, that they're averaging 3% to 4% better return with less risk. You can't get that in a 401k. Long-term growth is fine. You stay in the market for 20, 30 years or you're going to make money, but when you're getting close to retirement or into retirement, you can't afford to drop 30% and 40%. You'll never recover. So actively managed accounts are very critical, I think, in the planning process to have that decent growth but less risk.

Speaker 1 8:57

Well and a 401k lives in a bubble. Maybe you can reach out to your 401k managers and see what's available to you. They may even give you a recommendation, but that 401k manager is only considering your 401k and not your entire asset picture, your entire retirement picture, which is why we stress you have to have a. It's not about one account, it's about the entire holistic plan, right?

Speaker 2 9:21

and and even the p, even the companies that will manage your 401k. Of course they charge a fee, like everybody does, to manage it, but there's limitations on how many trades they can do a month. I mean we can do 6, 8, 10, 12 trades in an account. If the computer is saying, hey, you need to buy this now, you need to get rid of this. Now. 401k typically one, two times a month can you trade, so you may miss a window of opportunity, even if it's being managed by an outside company. So again, another limitation on 401k. We love them when you're working, we love the match, but when it comes to, you know, pre retirement planning or retirement planning, they are very archaic and again it goes back to the first point too.

Speaker 1 10:01

When you're working with a professional advisor, independent advisor again they have so many more options in what's built into your 401k and again those mutual funds are set and they're all individual. You know what you're getting, but there's not a whole lot of wiggle room and you've only got so many opportunities to change investments throughout the year. So you're really locked in. When you work with an advisor, especially one who uses actively traded funds, you they're making trades at no cost to you. It's fee based. They're making trades when they need to, not okay, I've already made a trade this quarter, I can't move, or whatever the rules might lock you into yeah, and then also because of the way the, the 401k is structured.

Speaker 2 10:45

Um, again, you're using mutual funds that are expensive. You can only trade so many times. I've not counted yet. Maybe I need to count how many portfolios we have available 150, 200?

Speaker 1 10:56

Well, truth be told, the amount we have available, we don't even use that, oh no, no, we don't.

Speaker 2 11:01

But we know what portfolios can accomplish what we're trying to accomplish, what portfolios can accomplish what we're trying to accomplish. We have one that historically has been half the risk of the S&P but has been matching the S&P return. That's a powerful tool when things are a little bit rocky. Hey, I still want that 7% or 8%, but I don't want to take much risk because the market's kind of all over the place Now would I put all of somebody's money in that? No, of course not, because I've got different markets react with different portfolios and vice versa. But we want to pick the three, four, five, six portfolios to accomplish the different purposes we have for that individual and no individuals alike. That's right.

Speaker 1 11:39

Number four consider your timeline for retirement and rolling over early to mature accounts for retirement and rolling over early to mature accounts.

Speaker 2 11:51

Yeah. So again, this gets back to one of the rules with 401ks, if you know this or not. Number one as Evan mentioned earlier, you can roll over your 401k if you leave an employer. So now it's free to roll to an IRA. Some people roll that to a 401k at their new company. I think that's a mistake in most cases. This is not a blanket statement, but I am saying that again, you're limited in what you can do in that new 401k, just like you were in the old 401k. Also, there's the in-service age-based rollover that's available. So I don't know if we're going to talk about that later or not. This section, yeah, okay. So if you're 59 and a half or older and you're in service so if you're 59 1⁄2 or older and you're in service, which means you're working for that company that has your 401K you have the right 95% of the time to roll part or all that 401K into an IRA so you can get a jump start on your retirement accounts and you can keep it open and continue to contribute while you're working.

Speaker 2 12:42

They don't close a 401K. You're still working, they're still matching. That's all good, but we're getting that money into some positions to not only be ready for retirement but to do a better job historically of managing and creating the kind of buckets we need for retirement. So if that's something that sounds like it's a, it is a powerful tool. By the way, if you're 59 and a half or older still working, we can give you a lot of reasons, just like we are today, why it might be smarter to roll that to some IRAs for yourself.

Maximizing Retirement Income Strategy

Speaker 1 13:12

Yeah, If you are interested in discussing your own retirement, we do offer complimentary consultations. You can go to masterplanretiredcom. Click the Schedule Now button. It'll take you directly to our calendar. You find a time that works best for you. It's a simple conversation on your own retirement and we'll run a series of reports and give you a good 10,000-foot view of your current retirement outlook. So that's masterplanretirecom, or you can call us at the office, 770-980-9262. Mark, can you speak a little bit to what I mean by saying giving accounts time to mature?

Speaker 2 13:48

Yeah, so let's maybe just take an example. Let's say that we want to use a tool because this particular couple, let's say, has an income shortage in retirement. They have two Social Securities but no other pensions, no other guaranteed income pensions, no other guaranteed income. So they're at a little bit of a disadvantage because their only source of income, if they don't make a change, is from an IRA or IRAs or whatever that is in the market. Well, what does the market do? Very well, it goes up very well, and it drops. It goes down very well.

Speaker 2 14:18

Okay, so if you're taking out $10,000, $20,000 a year and the market's down 30% or whatever it may be the average bear market is greater than 30%, by the way, so this is not a strange occurrence and they happen every four to seven years. Okay. So how many times are you going to have a bear market in retirement? Five, six, seven times, whatever. And so if you're rocking along, taking money out of the market, you may be digging into a principle you'll never make back. So I'm all trying to get to the point of this. So, digging into principal, you'll never make back. So I'm all trying to get to the point of this. So, one of those accounts that might be good to set up earlier would be an income producing account, because what we wanted to do is we want to protect the principal. So guaranteed principal, but growth with the market. So now we're getting growth that could average 4% to 8%, 4% to 9%, but no losses in a bad market Did you say 49%.

Speaker 2 15:05

That's why I wanted to repeat that, not 49%, 4-2-t-0-9. So we're getting a decent return, but we're not losing money in bad years and it has an income mechanism that we can turn on to give a guaranteed income stream for life for both of the couple. If we choose to do it that way and if there's money left over at the second passing, there's still money left to go to the kids or grandkids as well. So it's a powerful tool. It's really working well. They may come up with something better next decade, I don't know, but right now it is really being effective. We've got people that are turning them on every year and they're working. They do a great job providing that guaranteed income.

Speaker 1 15:47

That's great and it leads us to our fifth point. Withdrawals should be strategized carefully. So 401Ks, as we said, are designed for use in retirement, but they're designed to grow. They are not designed for income. So when you get to retirement, they are not living up to their most efficient usage. That's their one job is growth. Funds are chosen based on your timeline in retirement. 401ks are just too inefficient at producing income because that's not what they're designed to do.

Speaker 1 16:16

Take caution in drawing income from the stock market. A lot of people keep their 401ks there and just say, well, I'll take withdrawals income from the stock market. A lot of people keep their 401ks there and just say, well, I'll take withdrawals when I need it, and even systematic, I'll take this amount, amount per month. And, like you said, it's okay to take income from a rising market, but when that's falling and you're taking income on top of when you're taking income in a falling market, you're locking in those losses and you're not going to recover over time. So systematic income and we've said this before should not be taken from a growth account. 401ks also may have withdrawal limits.

Speaker 2 16:48

Right, you've got that situation. You've also got the matter of the fact that you know there are some people that say well, you know, I'm going to use a bond strategy, so I'm going to move all of my 401k into bonds and live off the bond interest. Well, bonds over the last 30 years have drastically underperformed and as the Fed begins lowering rates now, they're going to start underperforming again. So you're looking at an income level of two and a half to four and a half percent. These new income mechanisms that I mentioned a minute ago are spitting off five to 7% income, and it's guaranteed. Some people say, well, I'm going to put together a dividend portfolio in my 401k or even IRA, and I'm going to make sure the funds I'm picking are dividend-focused. Well, dividends aren't guaranteed. As you may or may not know, a dividend is a sharing of a profit from a stock company. Well, what if they're not profitable one year, which is typical when the market's falling? So now your account's falling and it's not producing income. That's the double whammy.

Speaker 2 17:50

So again, these newer income-producing accounts that are guaranteed principal, we know they're spinning off, in most cases, 5% to 7% and, again, that's guaranteed. And some of the ones we use it's increasing income so it keeps up with inflation as well. So again, you can't do that in a 401k. That's not available in 401k at this point. So getting that into these and we mentioned earlier about trying to do it a little bit earlier we want them to mature in these kind of accounts because we want to wait two, three or four years to turn on the income in most cases, to give that account time to grow bigger and produce greater income as well. So I don't think we ever hammered that point home.

Speaker 1 18:31

but I want to sweet spot of generally when you should start thinking about okay, should we start moving accounts and setting these accounts up so that when it's time for retirement they're ready to go and generally, what would you say? Five years?

Speaker 2 18:50

That's kind of a sweet spot. I mean, if you're retiring tomorrow, call us okay, but five years is a nice sweet spot. And you know, what's interesting is there's so many people that don't realize that a retirement consultant exists. They think, hey, I'm working with whoever company ABC down the road, and they manage my money. Yeah, but are they going to tell you when to turn on social security? Are they going to tell you how to produce income? Are they going to maximize your pension? Are they going to talk about tax planning?

Speaker 2 19:21

I've had clients come to me and they say you know, I wish I'd known you guys existed 10 years ago. I would have hired a retirement consultant, not just somebody to invest some money, because you guys do everything Medicare planning, I mean anything associated with retirement, estate planning. We've done shows on all of these subjects and we will continue doing so, because I think people just can't, they just don't realize there's a difference. So I think they would. It's almost like when, you know, when I turned 50, which was like a year ago, I think, if I remember right I'm just kidding so when I turned 50, I began looking for doctors that specialized in the aging process, you know, internal specialists.

Speaker 2 19:58

My regular GP, you know, was more about going and getting my flu treated or whatever it may be. I'm sick, treat me, type of thing. So I had to make that next level of expertise. That's kind of what people do with us. They get in that 50 range and they go. I need more help than I'm getting from my person down here, my stockbroker or whatever it may be, and so I think discovering this is kind of a big aha for a lot of people.

Speaker 1 20:23

Yeah, yeah. And I don't think we've ever worked on an income plan and if we had given the option to have a few more years of preparation just for that, that building process, that we would say, nah, you know, we didn't, we don't need it because you know we, we have taken people after their retirement Of course we do and people who are like, hey, I'm retiring in two weeks and we will get it rolling for you, but just, the options just increase dramatically the more time you give yourself to actually set up your plan and make sure everything is humming.

Speaker 2 20:57

Well, and the coolest part too, is when people come to us. Sometimes it's at the end of the first phase, which is the planning process. Sometimes it's two years later, sometimes it's when they retire three years later. But they're like you guys. You were able to help me retire two years earlier, one year earlier, three years earlier. Now I'm able to take care of my aging parents. Now I'm able to travel or whatever. So, again, if you maximize that efficiency just like going back to a doctor if you maximize your health efficiency, do the right things as soon as possible, you're going to maximize your lifespan. Same thing with retirement as well, and I just love to hear those stories. People come in. Thank y'all. Y'all saved me. You've added years to my retirement. You give me peace of mind. I don't have to watch the market to wonder if I'm going to have income. It's just really neat to hear those stories. Absolutely.

Speaker 2 21:52

The last point, number six RMDs are calculated separately per 401ks and do not aggregate like your IRAs. Yes, a lot of folks don't realize this, but if you're 73 or older and you're taking required minimum distributions, that's an amount that any money you have in an IRA you're forced to take out a percentage every year. It's a rising percentage. Well, what's nice is is you don't have to take it from every IRA. You can say, okay, I've got to take out this much, but I'm going to take it all out of this one because this is really done well. Or I'm going to take it out of this one because it's not down where my other accounts are down, or whatever it may be 401k. You have to take it out of that 401k, whether it's up, down or sideways or whatever, and you do, even if you're still working.

Speaker 2 22:26

In some cases still have to take money out of a 401k as well as an RMD Not every case and the rule is a little bit tricky there. So if you have a question about that, let us know. But part of it has to do with ownership and how much of that company you may own as well. So I may want to write that question down. If you're 73 or older and still have a 401k, do you have to take RMDs from it? If you're working, maybe, maybe not Right, great point.

Speaker 1 22:50

And you know we're talking about retirement planning closer to retirement, but it's never too early to maximize your 401k as well. So if anyone's listening and you know, maybe you've got a longer time horizon, you're younger and you've got a longer career path ahead of you, give us a call as well. Reach out to us via the website masterplanretirecom. It's never too early to maximize your growth as well.

Speaker 2 23:12

We have several younger clients and we don't necessarily target the audience, but part of the reason we have them is their parents work with us and the parents are like you got to go see these guys. I wish I'd started at your age because if I did I wouldn't have any worries. So yeah, absolutely Anybody we can help, we will.

Speaker 1 23:26

Absolutely, Mark. We're just about out of time. Any closing remarks today.

Speaker 2 23:30

Hey, make sure you visit the website masterplanretirecom. Lots of resources, bookmark it, share it with your friends. It's an educational tool first, okay, but also you push that green button Again, we'll run a series of reports for you, have a chat. It's all complimentary. Let's find out where you're at so we can figure out if we can get you where you want to be. Okay, that's kind of the whole part of the process. So, masterplanretirecom, or give us a call 770-980-9262. But, more importantly, until we see each other again, plan well and prosper, take care. This was Retirement Roadmap Radio with Mark Fricks of Master Plan Retirement Consultants. To schedule a complimentary consultation, go to masterplanretirecom or call 770-980-9262. No-transcript.