Once you hit your 60s, your priority should be focused on transitioning to retirement. In terms of your 401k, planning an exit strategy is a key focus during these years.
You should have eight times your annual salary saved for retirement by age 60, and 10 times your salary saved by age 67, according to Fidelity. Although these are just benchmarks, they do serve as a helpful guideline to gauge your progress. Click through to find out how to master your 401k in your 60s and make sure you're on track for retirement.
1. Plan Your Exit Strategy
In your 60s, it's time to think about your exit strategy. You'll transition from working and saving to retiring and spending, said financial planner Sterling Raskie of Blankenship Financial.
“Individuals in their 60s may find it difficult to spend this money since they've put so much working into accumulating it, nurturing it and protecting it," said Raskie. "They may have the best-laid plans for retirement, but they may also find it difficult to implement retirement goals due to this phenomenon. This is where a competent adviser may help counsel them on their fears and concerns regarding this issue.”
The whole process of transitioning from work to retirement is complex. That's why it's important to develop a retirement withdrawal strategy. People nearing retirement should consider consulting with a qualified fee-only financial advisor.
2. Consider an In-Service Withdrawal
An in-service withdrawal can give those in their 60s broader choices by rolling their balance to an IRA — or, if applicable, to a Roth IRA — where they will have a broader selection of investments and greater control over their portfolio, said Mike Piper, personal finance author and owner of the popular finance blog Oblivious Investor.
“For people over age 59½ who are still working, if they don't like the investment options in their plan — or if their plan has high administrative costs — they should look into whether or not the plan allows for in-service distributions,” said Piper.
3. Don’t Automatically Roll Your Balance to an IRA
A common suggestion is to roll 401k accounts over into an IRA as soon as possible, said Piper. "But in some cases, it makes sense to keep the money where it is,” he added. He cited the example of someone wanting to use the “backdoor Roth” strategy, in which rolling a large 401k balance to a traditional IRA would subject their conversion to much higher taxes.
“I think one thing these folks need to be cognizant of is whether it's prudent to roll the 401k to an IRA or not," said Raskie. "The main reason is if their fees will be higher in the IRA — [such as] AUM fees, commissions, expense ratios — it may make sense for them to keep it with the plan provider. If the plan provider is with a relatively inexpensive custodian that uses index funds like Vanguard's or Fidelity's, often these fund companies will have much cheaper expense ratios for firms that do business with them than what an adviser may be able to offer.”
4. Consider Using the NUA Rules
People whose 401k accounts include appreciated employer stock should consider meeting with a tax professional to see if they can take advantage of the "net unrealized appreciation" rules, said Piper. In the right situation, this strategy can potentially save investors a significant amount of money in taxes.
“Those rules allow them to roll the employer stock into a taxable brokerage account, and roll the rest of the 401k into an IRA," he said. "By doing so, for the distribution of employer stock, rather than the whole amount ultimately being taxable as ordinary income, only the basis in the stock is taxable as a distribution. And when the stock is eventually sold, it will be eligible for capital gain tax treatment rather than being taxed at [higher] ordinary income tax rates.”
5. Don’t Get Too Conservative
It's important that 401k investors in their 60s avoid becoming too conservative with their accounts, said Clint Haynes, founder and financial planner at NextGen Wealth. “Don't put everything in cash in bonds," he said. "While that might be safe from the perils of the stock market, you still have to worry about inflation eating into your purchasing power for the next 20-plus years. Don't fall victim to the silent killer of inflation … your future self will be grateful.”
Remember, in your 60s, you might still have 25 or more years of life left that you have to fund. You need to think in terms of that life expectancy as your investing time horizon. Don't treat retirement as the point to “put it all under the mattress.”
6. Be Cautious With Target Date Funds
By the time you get to your 60s, most target date funds are at or nearing their "glide path," which means your asset allocation will be much more conservative. If you are a target date fund investor, or considering going that route, you need to look closely at the fund you are considering and decide if this is the “horse you want to ride” into retirement.
7. Keep Contributing as Much as You Can
Even though you don’t have the gift of time that someone in their 20s or 30s has, it still makes sense to contribute as much as possible into your 60s. You are still building your retirement nest egg, and you still get a tax break for contributions to a traditional 401k account.
If you have a Roth option in your plan, this can be a good way to diversify the tax status of your retirement accounts. If you're interested in the estate-planning benefits of a Roth IRA, this is a good way to build up a Roth balance, which can then be rolled to a Roth IRA.
8. Consider a Reverse Rollover
If you are planning to work past your 60s and into your 70s, one of the advantages is that you will not be required to take required minimum distributions from your 401k account at age 70½ if you do not own 5 percent or more of the company sponsoring the plan, according to the IRS. Your employer has to add this option to their plan document.
If you've rolled money from old 401k plans from other employers into an IRA, this money can be rolled into your current employer’s plan, assuming they accept transfers. As of a couple of years ago, some 69 percent of plans did, according to the Plan Sponsor Council of America, as reported by Reuters. The money must have been the result of pre-tax contributions. Likewise, pre-tax IRA money can be brought over as well.
Besides keeping this money from being subject to required minimum distributions while you are working, having this money in your 401k account can help minimize the amount that will be subject to taxes should you decide to do a Roth IRA conversion using the “backdoor” method.
9. Get Your Beneficiary Designations in Order
This is important at all ages, but especially in your 60s. You will want to ensure that any life changes, such as the death of a spouse, divorce, remarriage or the like, are reflected in your beneficiary designations. Retirement plans, including 401ks, pass on to your heirs according to the beneficiary designation, and not according to a will or other estate planning document.
10. Meet With a Financial Advisor
As you near retirement and consider an exit strategy, this is the time to sit down with a qualified fee-only financial advisor. They can use their experience to take a detached third-party view of your situation and offer strategies and tactics for issues like:
- Whether or not to roll your 401k to an IRA
- Your asset allocation and investment strategy
- Tax considerations in retirement
- Developing a withdrawal strategy
- Deciding when to claim Social Security
Advice on these and other topics can be invaluable. Without proper guidance, the price of too many bad decisions could ruin your retirement.