5 Ways to Make Your 401(k) Last Longer
Deciding how your money will last longer remains a key part of retirement planning. Many people think about the money they must contribute to their plans but give little thought to financial longevity once they retire.
The volatility of the market can negatively affect your 401(k) account balance, but certain steps can make your money last longer in any market.
Delay Your Withdrawals
Delaying your withdrawals until the mandatory withdrawal age of 70 ½ will help make your 401(k) balance last longer during your retirement years. By delaying your distributions, you have more time to grow your money in your tax-deferred 401(k) account. The longer your money sits in your account, the more compound interest will accrue.
At 50 or older, you are able to increase your annual contribution into your 401(k) plan. This will also help you accumulate more money in your retirement account by the time you start your required withdrawals.
When you make unauthorized withdrawals from your 401(k) plan, you will incur penalties and taxes. Withdrawals are normally taxed as ordinary income, and a 10 percent penalty tax is also assessed to early withdrawals. Unnecessary penalties from early withdrawals lower the value of your plan.
Exceptions exist for some early distributions. You will not receive an early withdrawal penalty if you suffer a disability, lose your job at 55 or older, experience qualified financial hardships, pay college expenses or use the money as a down payment on your first home.
Live on Less Money
As you plan for retirement, determine the amount of money you want to live on during your retirement years and calculate your contributions accordingly. Another way to make your 401(k) balance last longer is to live on less money. Revisit your budget to determine if your expenses are less than what you budgeted for, or if you can cut some of your expenses. Taking less money in distributions will cause your 401(k) account balance to last longer.
Reinvest your Distribution
Although you are required to take withdrawals from your account at age 70 ½, it does not mean that you are obligated to spend your money. To make the money in your 401(k) last longer, you can reinvest your distributions in a low-risk investment.
You should take caution with the investments you choose, because you do not want to risk losing a large amount of money. Relatively safe investments include certificate of deposits, money market accounts and treasury bills.
Invest in Riskier Assets
If you are starting your 401(k) contributions at young age, investing in riskier assets will give you a better chance of earning high returns than investing in less risky or risk-free assets. Stocks give you a better chance at earning a high return than mutual funds or bonds.
Your risk tolerance and financial goals will help determine the specific assets for your 401(k) account. As you get older, you can re-balance your 401(k) to invest more of your money in safer assets.