Can I Retire at 57? 73-Year-Old Asks for Advice on Withdrawing 401(k) Funds for CDs
Archie, a 73-year-old retiree, is concerned about the poor performance of his 401(k) in recent years. He is considering withdrawing his funds from the 401(k) and investing them in certificates of deposit (CDs) to seek stability. However, financial advisor Matt Becker warns Archie about the potential costs of such a move.
Becker explains that withdrawing the entire 401(k) balance in one year could result in higher tax rates due to the progressive tax code. Spreading out the withdrawals over several years would allow Archie to be taxed at lower rates and retain more of his money. Additionally, the tax-deferred growth of a 401(k) can help the funds last longer compared to a taxable account like CDs.
Instead of solely relying on CDs, Becker suggests finding a balance between safety and growth by keeping a large cash reserve separate from the invested portfolio. This cash reserve, equivalent to one to three years of expenses, can be stored in checking accounts, savings accounts, and CDs. Regular replenishments can be made through tax-efficient withdrawals from retirement accounts.
Regarding investment strategy, Becker emphasizes the limited long-term growth potential of CDs compared to a well-diversified investment portfolio. He suggests ensuring that the 401(k) is properly invested with the right asset allocation and a diversified collection of index funds. If this cannot be achieved within the 401(k), Archie could consider rolling the funds into an IRA for more control over investment decisions.
Ultimately, Becker advises Archie to strike a balance that allows for stability without sacrificing growth or overpaying in taxes. While the desire for stability is reasonable, there are alternatives to solely relying on CDs. By implementing the suggested strategies, Archie can navigate the ups and downs of the stock market in retirement while still achieving his financial goals.
