$1 Million in Your 401(k)? Here Are Your Next 6 Moves
You did it: your 401(k) just crossed the $1 million mark. Take a moment to celebrate -- this is a milestone fewer and fewer Americans reach. The average 401(k) balance for people over 55 is $271,320, and the median is even lower, at $95,642. Hitting seven figures puts you in rare company.
But becoming a 401(k) millionaire isn't the finish line -- it's a new starting point. Reaching this milestone means you've mastered disciplined saving and smart investing. Now you need a different skill set: protecting what you've built.
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Managing a seven-figure portfolio comes with new challenges, like minimizing taxes, managing risk and making your money last through retirement. Here are six essential moves to make once your 401(k) hits $1 million.
1. Keep Getting That Full Employer Match
Just because you have $1 million in your retirement account doesn't mean it's time to stop. It took dedication and good savings practices to reach that level, so it shouldn't be hard to continue contributing as much as possible -- or at least to the level you get your full employer match.
That's the closest thing to free money you'll ever get, so don't leave any on the table even once you've reached your goal. In other words, if someone else -- your employer -- is willing to finance a portion of your retirement, do all you can to take advantage, as it reduces your savings burden.
2. Create a Retirement Budget
Your lifestyle will undoubtedly change after you retire, and it's top priority to be prepared. While you can't know exactly what your retirement will be like until you get there, it can pay huge dividends to make a tentative budget as early as possible. This way, you can estimate how much money you'll need in your 401(k).
If $1 million still isn't enough, you'll know that you either need to keep pumping up the returns in your account or reduce your planned retirement expenses. If it is enough, you can take a little risk off the table in your account.
3. Play Some Defense
If you took outsized risks in your 401(k) plan to reach that magical $1 million balance, this is a perfect opportunity to play a little defense and protect what you have. Otherwise, with just one bad year or month, depending on how your account is structured, that $1 million could drop to $500,000. This would change your retirement lifestyle dramatically.
While you don't have to move all your money into short-term CDs, revisit your asset allocation to make sure you're not overweighted in speculative investments like penny stocks or cryptocurrency.
4. Consider Your Tax Situation
The money in your 401(k) is tax-deferred, meaning you don't really need to worry about taxes while it's still in the account. But when you do withdraw that money in retirement, it can become a tax headache. While this would hopefully never happen, if you were to take out all $1 million in a single lump sum, you'd be in the top 37% tax bracket, regardless of your filing status.
If you also live in a high-tax state like California, you'd lose more than half of your account in a single blow just to taxes. But if you can withdraw your account more slowly, you may be able to remain in a lower tax bracket. Over time, you could literally save hundreds of thousands in taxes with a prudent withdrawal strategy.
5. Consult With Experts
A $1 million nest egg means it's time to call in the experts, if you haven't already. Discuss your tax and estate planning situation, your insurance needs and the best way to maximize your portfolio for future retirement needs. Whether that consultation confirms you're on the right track or unearths a need for more advanced planning, it's prudent and worth the effort.
6. Stay the Course
If you've managed to build a seven-figure 401(k) balance, you might not have to do much at all -- because you're likely doing most things right already.
While you might want to do some additional planning and perhaps tweak your asset allocation a bit, the principles that got you to this admirable level -- like diligent saving, smart investment planning and living within your means -- will continue to serve you well.
John Csiszar contributed to the reporting for this article.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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