I’m Retired and I Regret Investing In My 401(k) — Here’s Why
Written by
Levi Leidy
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When funding their golden years, most Americans rely heavily on their 401(k) retirement accounts to make it happen. But for 67-year-old retiree Therese R., that widely accepted wisdom doesn’t exactly check out. She regrets sinking so much into her 401(k).
Here’s why one retiree regrets investing in her 401(k).
The Drawback of Being Over-Invested
“First, I have to say: I’m incredibly fortunate that years of diligent 401(k) saving allowed me to retire comfortably at all,” said the Phoenix resident. “But I do wish I hadn’t put quite so many eggs into that basket.”
Therese said that having the bulk of her net worth tied up in a 401(k) brings some serious downsides she didn’t fully realize when younger.
Penalty Taxes Eat Into Withdrawals
“Any money I withdraw gets slapped with paying ordinary income tax rates,” she said. “When you’re retired, even slightly higher tax rates can add up to thousands of dollars lost each year.”
Therese estimated she currently loses around 25% of each 401(k) distribution to federal and state taxes. That’s a major chunk out of the income she was counting on from decades of contributing to those accounts.
Mandatory Withdrawals on Uncle Sam’s Schedule
Another drawback Therese has found? The lack of flexibility around when she can access her funds once she hit age 72.
“I have to start taking mandatory minimum withdrawals from my 401(k) accounts whether I need that money or not,” she said. “It would have been nice to leave more funds untouched for a while to keep compounding.”
But under IRS rules, retirees must begin depleting their tax-advantaged retirement accounts on a strict schedule in their 70s. Not doing so results in steep penalties.
Access Limitations During Rocky Markets
During intense stock market volatility, Therese has also learned the hard way about the restrictions in place to access 401(k) funds.
“Because the bulk of my net worth is tied up in my 401(k), there have been times with the markets down where I couldn’t get to that money as easily as I’d like,” she said. “With more diversification across brokerage accounts, I’d have greater liquidity.”
While they offer great tax advantages during the accumulation years, 401(k)s have plenty of rules around distributions in retirement that have been eye-opening experiences for Therese.
“I’m not saying 401(k) investing is wrong by any means,” she stated. “But I do wish I’d invested more in regular brokerage accounts and rental property as hedges.”
Diversifying Income Sources in Retirement
Therese acknowledges the incredible value her 401(k) accounts have given her in retirement. But looking back, she would have invested less aggressively and put more into alternative income sources to complement them.
“My advice to people younger than myself would be to still absolutely take advantage of 401(k) accounts and the free money from any employer match,” she said. “But I’d also spread that money around more into a Roth IRA, taxable brokerage account and rental properties if you can swing it.”
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