Nearing Retirement? This Calls for a 401(k) Tune-Up

by Jennifer Nelson |October 30, 2019

Is retirement on the horizon for you? Before you plan that epic send-off party, take stock of where your 401(k) plan is right now — and boost it.

The 401(k) — that employer sponsored retirement account that allows you to set aside pre-tax money from your paycheck for your golden years — has a reputation as a smart and powerful retirement savings plan. And with good reason: It's one of the best strategies for long-term saving since it allows for pre-tax savings.

Of course, it takes a proactive mindset and a bit of know-how to effectively tailor your 401(k) at every stage. And, if looking to retire within the next five to 10 years, now is the right time for a check in — especially since as you age your tolerance to market volatility decreases, resulting in the need for more stable investments. So it's important to stay one step ahead of things.

To help you do just that, here are five tips to consider for tuning up your 401(k) before you tap into those retirement funds.

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3. Rebalance your assets

Consider rebalancing when your retirement fund's asset allocation — how investments are split among stocks, bonds, etc. — shifts outside of a set threshold, such as a 60/40 or 70/30 stock/bond mix, advises Robert Johnson, PhD, a Nebraska-based finance professor. Remember, just because you're retiring doesn't necessarily mean your portfolio should become overly conservative or stop growing. You may not want so much market exposure that it keeps you up at night, but you may want to work toward enough of a stake to potentially secure return over the long run and stay ahead of inflation.

"My experience is that it's best to not stress out and try to time the market," says Karsten Jeske, PhD, CFA, who retired at 44 and blogs at Early Retirement Now. Jeske says that you can be more aggressive in your asset allocation if you're flexible about your exact retirement date. And, if you have employer stock in your 401(k), it shouldn't represent more than 5% to 10% of your overall portfolio, Jeske says.

Your asset allocation can have a much greater impact on your portfolio performance than the individual investments you pick. When you're within the five-year retirement red zone, consider beginning to reduce your risk exposure. "A large downturn in the market immediately preceding retirement can have devastating effects on an individual's standard of living in retirement," says Johnson.

Many investors assume you should allocate more to bonds than stocks at that point. Johnson, however, believes that is not necessarily a risk-free move either: As interest rates rise, the market value of existing bonds falls. Further, the value of long-term (long duration) bonds fall much more than short-term (short duration) bonds, so near-retirees are often better served by moving into short-term bonds as interest rates are likely to rise.

Bear in mind, though, that market-driven rate fluctuations don't impact the return on a given bond that's held to its maturity. Bond mutual funds, however, are more likely to decline in actual value amid rising rates. Whippo opted to rebalance to a more conservative portfolio a year and a half ago. "We moved from individual stocks to mutual funds and money market accounts," she says.

There are other vehicles that help save for retirement, like annuities. These products convert a lump sum from your retirement account into a steady stream of monthly payments over your lifetime, which can cover your basic living expenses. You can then be more risky with the rest of your stock portfolio because you have a pot of money to cover the essentials. However, owning annuities may come with fees, expenses and surrender charges. Consider consulting a financial professional about how annuities work, the costs and whether this type of instrument belongs in your 401(k).

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5. The 4% rule is now the 3% rule

When it comes to preparing for your withdrawals, the old adage said that you'd likely need to spend 4% of your retirement savings each year. "It's predicated on the fact that historically, mixed stock and bond portfolios have returned a certain amount of money," says Johnson. "But in a sustained low-interest rate environment, like we have been in for the past eight years, the bond portion of any retirement portfolio isn't earning a lot."

When bond portions don't earn a lot, stocks must make up for them, and that just might not be sustainable over the long term.

The 4% rule may have covered an average lifespan decades ago, but what if you outlive that? To be safe, consider aiming to spend more in the neighborhood of 3% — that means withdrawing 3% of your retirement account annually over your retirement. Check with your advisor to be sure your funds will support this or use an online retirement calculator to see how long your money might last.

Don't let a "set it and forget it" approach to your 401(k) limit the horizons of your retirement savings. With a bit of forethought and attention to detail, you can harness the true power of this savings plan to help make those golden years a bit brighter.

Jennifer Nelson

is a Florida-based writer utilizing all she learned about 401(k) tune-ups to make sure her own retirement strategy stacks up. Nelson writes for AARP, Forbes.com, NextAvenue.org and many other outlets.

The content reflects the views of the author of the article and does not necessarily reflect the views of Citi or its employees, and we do not guarantee the accuracy or completeness of the information presented in the article.