Savings 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.

1. Adjust contributions

According to a 2015 Financial Engines study, American workers leave an estimated $24 billion in unrealized employer matching contributions on the table each year. For workers nearing retirement, if you’re not tapping the potential of your employer’s matching contribution, you are missing out on a key method for accelerating your nest egg’s growth.

"You have fewer working years left to save and invest, so be sure to take full advantage of the employer match," suggests Brendan Dooley, CFP®, CRPC, the president and founder of Meaningful Wealth Management, LLC.

Understanding how your employer match works is critical to maximizing savings. Check in with your human resources department about maximizing the benefits offered and, if possible, up your contribution to make the most of employer matching.

People in the final stretch of their careers are often earning more money than they have before — so take advantage of this. For example, split any raises and put half in your pocket and the other half straight to your 401(k); likewise with any bonuses.

Finally, most retirement plans have an auto-escalation feature in which they automatically increase by 1% annually. Consider opting in. “Take as many of these decisions out of your hands so you don’t have to remember to do them,” Dooley says.

Understanding how your employer match works is critical to maximizing savings.
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2. Revisit your retirement plan

If you haven't met with a financial advisor in a while, it's a good idea to do so five to 10 years before you retire. Revisit (or create) a plan that includes your goals and objectives for your final working years regardless of what’s happening with the market.

And, on top of that retirement fund, be sure to allow for a cushion you can access for unexpected life events — say, job loss or serious illness.

Of course, leaving the working world behind isn't the right retirement move for everyone — unretirement or partial retirement is a trend that's on the rise. Rose Whippo, 65, of Clermont, FL, and her husband have made a plan for semi-retirement. They've recently relocated, bought a house and are paying for their daughter’s upcoming wedding, so they've decided to continue working part-time, and not withdraw funds so they can max out their retirement accounts.

“We will reassess our financial situation mid-to-late next year to see if we want to continue working,” says Whippo. “We also want to delay withdrawing monies from our retirement savings until forced to do so at age 70 and a half."

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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4. Reduce exposure to the sequence of returns risk

Investment rates fluctuate over the years. This order — known as the sequence of returns — can impact the value of your portfolio. “Depending on when you're going to clock out for good,” says Dooley, “you need to mitigate your risk that a market decline will dramatically alter your retirement plans.”

If the really bad returns come when you first begin to take those distributions, for example, those effects ripple through the remainder of your retirement. You can potentially mitigate the sequence of returns risk either by changing your asset allocations, by making the portfolio more conservative or by not taking distributions in those early years.

A potential scenario: Say you are planning to retire right now, but the market is down 20%. If you waited six months or a year, the effect could be twofold. “You are not taking a distribution in that down market, which helps protect you from the sequence of returns risk,” says Brandon Renfro, PhD, an assistant professor of finance in Texas. And you’re still working — thus contributing more to your 401(k).

You need to mitigate your risk that a market decline will dramatically alter your retirement plans.
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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.

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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,, and many other outlets.