Best and Worst Things You Can Do With Your 401(k) at Retirement

Wooden block with the number 401K with some money around.
Marvin Samuel Tolentino Pineda / Getty Images/iStockphoto

While work stops once you retire, continuing to plan for retirement shouldn’t, several experts say. Indeed, there are several steps retirees can take to keep their savings on track and continue to grow their nest eggs, as well as many factors to consider in order to avoid drawbacks. 

According to Jay Zigmont, founder of Childfree Wealth, you should have a plan for your 401(k) and IRAs before you retire.  

“The challenge is that many of the skills that you have used to accumulate your wealth do not apply when you are taking money out, in the deaccumulation phase,” Zigmont said. “You now have a relatively fixed income that needs to last you throughout your retirement. You need to have control of your expenses and need to stay out of debt. If you can be completely out of debt, including your home, prior to retirement, you will find it is much easier to make ends meet.” 

What Are the Most Common Mistakes With 401(k) Plans in Retirement? 

Take a closer look at some of the most common mistakes made with 401(k) plans after retiring.

Rushing Into Any Action Without Fully Understanding the Consequences

To avoid this, Americans should take the time to put together a withdrawal strategy for the short-, medium- and long-term. 

There are big decisions to make including whether to gradually withdraw money or to roll it directly into an IRA or even an annuity and each has advantages and disadvantages to consider, said Bobbi Rebell, founder of Financial Wellness Strategies and author of “Launching Financial Grownups: Live Your Richest Life by Helping Your (Almost) Adult Kids Be Everyday Money Smart.”

Are You Retirement Ready?

For example, Rebell said, an IRA does not provide protections from creditors but a 401(k) does because it falls under ERISA (Employee Retirement Income Security Act).  In addition, retirees should also know that annuities carry unique risks and should be fully understood before buying them. 

“Remember that as the money comes out of a 401(k), it is taxed unless it goes into another tax-sheltered vehicle like an IRA,” Rebell said. “You may have other income sources to consider including part time work, Social Security, a pension and income producing investments.  So if you simply cash it out, you could face a big tax bill in just one year.”

Underestimating Healthcare Costs

Many Americans rely on Medicare, but Medicare often limits the care you can get and where you can get it and how often, so expect some unexpected medical costs as you age, said Tatiana Tsoir, CPA, business expert and founder of The Bold Blog.

Indeed, several experts stress the importance of not only having a plan for healthcare but also for long-term care.  

“Medicare will cover your healthcare costs in retirement (after 65) but will not cover long-term care. Long-term care in the U.S. right now has an average cost of $108,000 per year. Women on average will spend 3.7 years in long-term care, and men will spend 2.2 years. That is a huge expense you need to have a plan for,” Zigmont said.  


Not Taking Required Minimum Distributions

While you won’t need to start taking distributions from your 401(k) immediately when you’re done working, you will have to begin taking the required minimum distributions. 

Are You Retirement Ready?

If you were born between 1951-1959, you’ll need to take them at age 73, and if you were born in 1960 or after, you’ll need to take them at age 75, said Tiana Patillo, financial advisor, Vanguard Personal Advisor Services.

Generally, rules controlling what you can and cannot do with your 401(k) after retirement are very complicated, so it’s important to work with a financial advisor who can guide you through the process, Patillo added. 

“One of the biggest mistakes retirees make is forgetting to take 401(k) distributions in retirement, which are typically required after age 72,” Patillo said. “The penalty for missing a required distribution is 50% of the amount that should have been withdrawn, so this mistake can really take a chunk out of retirement savings.”

What Are the Best Things You Can Do?

Here’s a look at some smart moves to make.

Taking a More Conservative Investment Approach and Setting a More Conservative Budget

For people about to retire or in early retirement, this is key, especially in an inflationary and uncertain economic environment, such as the one the U.S. is currently experiencing. 

“Especially during the early years of retirement, when you’re beginning to withdraw assets from your retirement nest egg, it’s important to employ a strategy that considers capital preservation. Without this consideration, the combination of spending and volatile markets might deal your portfolio a blow from which it may not be able to recover,” according to Morgan Stanley. 

Are You Retirement Ready?

If you don’t have a plan in place that takes into account hobbies you’d like to try, places you want to travel or even just a rough idea of what you want your average day to look like, you’ll end up spending far more than you ever intended, said Taylor Kovar, CFP, CEO at

“Make a plan, give it a budget, and enjoy retirement!” Kovar said. 

Review Your 401(k) and Payout Policy Before Making Any Financial Decisions

Retirees with a 401(k) typically need to decide between leaving money in the plan until reaching the age of required minimum distributions, converting the account into an IRA to continue contributing to it, or starting to cash out the 401(k) to use saved funds, Vanguard’s Patillo said. 

In addition, those behind on retirement savings should explore making catch-up contributions. 

“Workers ages 50 and older have a higher annual 401(k) contribution limit than their younger peers, which will allow you to contribute more for retirement by speeding up your savings with the same tax advantages,” said Patillo, adding that this year, the catch-up contribution increases to $7,500, meaning that those eligible can contribute a maximum of $30,000 to their 401(k), $7,500 more than their younger peers.

In addition, if you want to keep contributing to your retirement savings, you’ll need to roll over your 401(k) into an IRA and have earned income that you can add to the account. 

“Thanks to changes to the SECURE Act that guides certain policies around retirement savings vehicles, you can contribute to a traditional IRA for as long as you’d like. You can roll over almost any type of employer-sponsored retirement plan, such as a 401(k), 403(b), or 457 into a Vanguard IRA,” she said.

Are You Retirement Ready?

All in all, experts recommend taking control of your retirement now, even if you’re years away from it — with an active approach and a plan in place, there will be less stress later. 

“That means maximizing your contributions (or getting as close as you can) and asking if your 401(k) provider allows you to have any personalization. Most 401(k)s simply bucket you into a massive group and don’t adjust based on your personal financial situation,” said Eliza Arnold, co-founder and CEO of

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