You spend your working life building up your 401k for the day you can finally stop working. But what you do with that money next can be even more important. Your retirement could last 30 years or more, and you need to make sure your nest egg lasts at least that long. While you are required to start taking your 401k money out at age 70-1/2, you need to look at your budget and financial situation to determine the best withdrawal strategy.
Create a Retirement Budget
Knowing how much you will need in retirement is crucial. Until you know how much you will be spending, it will be difficult to budget and control your 401k money. If you already have a personal budget in place, you can use that as a starting point. Keep in mind that some expenses, like the cost of commuting and expenses for a work wardrobe, are likely to go down. But other expenses, like health insurance and travel costs, are likely to go up.
Gather Your Income Information
Before you start planning your 401k withdrawals it is a good idea to determine how much of your post-retirement budget will be met through other sources. If you are eligible for a traditional pension or an annuity payment, you need to factor those payments into your budget. If you plan to work in retirement you need to consider that as well. The more guaranteed sources of income you have, the longer you can wait to start using your 401k funds.
Check with Social Security
The age at which you can collect Social Security benefits depends on the year you were born. You should receive a statement from the Social Security Administration every year showing how much you will receive each month at the minimum and full retirement ages. Figuring Social Security into the equation helps you develop a realistic budget and allows you to determine how much you can safely withdraw from your 401k plan in the interim. Chances are you will need more than just Social Security to live on, so keeping your 401k withdrawals as low as possible in the early years can preserve your nest egg for future needs.
Roll Over Your 401k
When you retire from your job, it is best to roll the money in your 401k over into a self-directed IRA. Rolling the money over into an IRA gives you more control over how the money is invested, and allows you to budget properly and take the money out of the plan as needed. Once you roll the money over into an IRA, you can divide the funds into a fixed income portion and a growth portion. The money in the fixed income portion of the fund can be used to pay for your living expenses, while the remainder of the funds are allowed to grow to provide future income.