What To Do When Your 401(k) Reaches $500K, According to CFPs
If you’re lucky enough to have $500,000 in retirement, you’re in the minority. The average retirement savings is about $299,000 for those 65 and older, according to Northwestern Mutual.
Which strategic moves should you make with your money once you get to $500,000? Here’s what certified financial planners had to say.
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Reevaluate Goals
Though $500,000 is more than the average amount of retirement savings, it might mean something different to you depending on your goals. Nicole Carlon, CFP at WiseOak Wealth, said reaching $500,000 is a good time to take a step back and revisit your financial goals.
“The account balance by itself doesn’t tell us whether someone is on track," Carlon said. "How far are they from retirement? What other assets do they have? How much income will they eventually need? Are they taking an appropriate level of risk for where they are today?”
She also said it’s important to ask these questions and take new steps if needed, rather than just keep doing the same thing.
Decide How Active You Want To Be
Carlon also suggested fine tuning how you contribute to your retirement account once you reach $500,000.
“Do they want to actively manage their 401(k) or do they want to set it and forget it?" she said. "If they’re looking for a more hands-off approach, a target-date fund may be one option to consider. If they prefer a more active role, it may be worth reviewing the investment choices available within the plan and making sure the allocation still reflects what they’re trying to accomplish."
Diversify Accounts
If all of your money is in one type of account, such as a 401(k), can cause tax ramifications later on, such as landing in a higher tax bracket and increased Medicare costs. To avoid this, James Hargrave, CFP and founder of Pillar Financial Planning, said building tax diversification through an HSA, Roth IRA or Roth contribution will add significant value to your retirement.
“For higher-income earners already maximizing their 401(k), a common strategy is to continue making pre-tax 401(k) contributions to save on today's taxes," Hargrave said. "Then, fund an HSA to lower taxes while growing funds tax-free for medical and retirement expenses. Then, utilize a Backdoor Roth IRA to grow assets tax-free. Last, build up assets in a taxable account to provide a third diversification of capital gains tax treatment."
Consider a Taxable Brokerage Account
Hargrave said for those in their 30s who have reached $500,000 in retirement savings, it might be a good time to consider a taxable brokerage account.
“Taxable accounts provide flexibility for the many financial decisions that occur between your 30s and retirement age, as they avoid the age-based requirements or workarounds involved with retirement accounts," Hargrave said. "Having immediate access to funds is worth forgoing some of the tax savings offered by 401(k) [plans] and IRAs.”
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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