For as long as you’ve worked, you’ve been scrimping, saving, and scraping together in devout dedication to your 401k . Now, it’s time to sit back, enjoy some warm weather, and take that much-needed “bucket list” trip across the US in your new comfy mobile home.
But wait…Can you count on your 401k alone as your essential investment account?
What if you need the money sooner than you thought?
The number one rule is to try to borrow on your dough. Depending on your preferences, the money in your 401k is usually invested in various stocks, bonds, and mutual funds. When you borrow money from your 401k, you are no longer receiving a return on your investment other than the interest you pay yourself on the loan. As a result, if the market is doing well, you may be missing out on big returns on your 401k by taking the money out.
What if you get the boot?
If you leave your job or get laid off, you usually must pay back your 401k loan in full within 60 days. If you don’t, the amount of the loan will be treated as a 401k distribution and considered taxable income. In addition to your increased tax liability, you will also incur early withdrawal penalties if you were not yet allowed to withdraw the money from your account.
Take as much as you can, to make as much as you can.
If your company offers a match, it is important to take full advantage of it. But contributing just enough to get the company match may not be enough.
A good goal is to contribute a minimum of 9% to 12% of your income to your retirement plan, which would include any employer contributions. Ideally, higher-income workers should consider contributing 12% to 15%, including employer contributions, to maintain their current standard of living in retirement.
Cash out early?
You may be able to cash out, but you’d take on a potentially large tax liability. You would owe ordinary income tax on the distribution plus a 10% premature distribution penalty if you were under age 59½.
Keep on working…
If retirement at age 65 isn’t a doable goal, move it out to 68, 70 or even 75. Not only will that provide extra time to accumulate additional funds for retirement, but it will also shorten the time period you need to cover. For example, assuming a lifespan of 85 years, you’ll need to accumulate enough money last for 20 years if you retire at 65. But delay retirement until 70, and you only need to cover 15 years. The longer you can work, the smaller your retirement savings need to be.