So you’ve finally done it. After decades of work early mornings and saving diligently, you’ve reached the promised land of retirement. Congratulations! But now comes a whole new challenge – figuring out what to do with all that retirement money you’ve been squirreling away.
I’ve spent years researching retirement strategies, and lemme tell you, there’s no one-size-fits-all answer. What works for your neighbor might be a disaster for you. But there are some smart moves that can help your retirement money last longer and work harder for you.
The Retirement Money Dilemma
When you retire you’re basically flipping the script on your financial life. Instead of adding to your nest egg you’re now figuring out how to make withdrawals without running out too soon. It’s kinda scary, right?
The average American is living longer than ever – around 77.5 years according to the CDC. If you retire at 62, that’s potentially 15+ years you need to fund! And many folks live well into their 80s or 90s.
Let’s dive into your best options for handling that retirement cash.
Leave Money in Your 401(k)
One of the simplest options is to just.. do nothing! When you retire, you can often leave your money right where it is in your 401(k). This approach has several advantages
- Your money continues to grow tax-deferred
- You maintain access to your plan’s investment options
- You’re familiar with how everything works
But there are some potential drawbacks:
- Some 401(k) plans have minimum balance requirements
- You’ll continue paying plan fees
- You might have fewer investment options than with an IRA
Eric Breemen, a Merrill Financial Advisor, points out that “there are a number of things retirees can do to control how long their money might last.” Keeping your money invested rather than cashing everything out is definitely one of them.
Develop a Sustainable Withdrawal Strategy
One of THE most important decisions you’ll make is how much to withdraw each year. The traditional wisdom suggests 4% as a starting withdrawal rate, but that’s not a hard rule.
Your actual withdrawal rate might range from 3% to 5% depending on:
- Your age when you retire
- Total savings amount
- Other income sources
- Health status
If you have $1,000,000 saved and use a 4% withdrawal rate, that’s about $40,000 in the first year of retirement to cover your living expenses.
For women, who tend to live longer than men, sticking closer to a 3% withdrawal rate might be smarter to avoid running out of money. Also, if longevity runs in your family, you might wanna be more conservative with withdrawals.
Transfer to an IRA
Rolling your 401(k) into an Individual Retirement Account (IRA) is another popular option, especially if:
- Your 401(k) has high fees
- You want more investment choices
- You have several retirement accounts you want to consolidate
IRAs often have lower fees than 401(k) plans and offer a wider range of investment options. Plus, you’ll still enjoy tax-deferred growth until you make withdrawals.
Consider Roth Conversions
A really smart strategy that many retirees overlook is strategically converting traditional retirement funds to Roth IRAs through a series of Roth conversions.
These conversions can be especially valuable during years when your income is lower. By paying taxes now (at potentially lower rates), you can enjoy tax-free withdrawals later. This could potentially save tens of thousands in taxes over your retirement!
However, Roth conversions can be tricky to execute properly. Working with a financial advisor who specializes in them is probably a good idea.
Invest Strategically for Income and Growth
Many new retirees get too conservative with their investments. While safety is important, remember that retirement could last 30+ years, so you still need growth!
Nevenka Vrdoljak from the Chief Investment Office at Merrill and Bank of America Private Bank warns, “Some investors tend to play it too safe as they begin retirement.” A portfolio that’s all cash and bonds can barely keep up with inflation over time.
Consider maintaining a diversified portfolio with:
- Dividend-paying stocks for income
- Growth stocks for long-term appreciation
- Bonds for stability
- Some alternative investments like REITs or commodities to hedge against inflation
Create a “Liquidity Bucket”
If market volatility makes you nervous, consider the “liquidity bucket” approach. Set aside 2-3 years’ worth of living expenses in cash, high-interest savings accounts, money market accounts, or other liquid investments.
The rest can be invested in a mix of stocks and bonds with potential for greater growth. This psychological safety net helps you avoid panic selling during market downturns because you know your immediate expenses are covered.
Plan for Healthcare Costs
Healthcare is one of the biggest expenses in retirement, and many people underestimate how much they’ll need.
About 70% of Americans 65 and older will need some form of long-term care, which is EXPENSIVE – a semi-private room in a nursing facility averages $111,325 per year!
Some options to prepare for healthcare costs:
- Traditional long-term care insurance
- Hybrid or permanent life insurance with long-term care riders
- Health Savings Accounts (HSAs) for tax-free healthcare spending
- Setting aside a portion of your savings specifically for future healthcare needs
Consider an Annuity for Guaranteed Income
If market ups and downs stress you out or you’re worried about outliving your savings, an annuity might be worth considering.
An annuity is basically a contract with an insurance company where you give them a lump sum, and they promise to pay you a regular income for either a specific period or the rest of your life.
There are different types:
- Fixed annuities provide a guaranteed payout
- Variable annuities offer potential for growth based on investments
- Indexed annuities are tied to market performance but with downside protection
Annuities do come with fees, but they provide certainty that many retirees find comforting.
Protect Against Inflation
Inflation is a serious threat to retirees on fixed incomes. Even modest inflation of 2% can reduce the purchasing power of $1 million in cash to just $603,465 over 25 years!
Some ways to hedge against inflation:
- Treasury Inflation-Protected Securities (TIPS)
- Real estate investments or REITs
- Commodities like gold
- Stocks, which historically outpace inflation over long periods
Be Smart About Social Security
Though not a place to “put” your money, being strategic about Social Security can significantly impact your retirement income.
For every year you delay taking Social Security beyond your full retirement age (up to age 70), your benefit increases by about 8%. That’s a guaranteed return that’s hard to beat!
If you have enough savings to live on initially, delaying Social Security can substantially increase your lifetime benefits.
Explore Non-Traditional Options
Some retirees find fulfillment and additional income through less conventional approaches:
- Start a business or side gig based on your passions or expertise
- Buy rental properties for passive income
- Invest in a garden for both enjoyment and to reduce grocery costs
- Upgrade to energy-efficient appliances to reduce monthly expenses
- Remodel your home for comfort and accessibility as you age
Give Back
If you’re fortunate enough to have more than you need, consider:
- Opening college funds for grandchildren
- Increasing charitable giving
- Creating an estate plan to support causes you care about
My Top Recommendations
If I had to narrow down the absolute BEST things to do with retirement money, I’d say:
- Maintain a diversified investment portfolio – Don’t get too conservative too early
- Establish a sustainable withdrawal strategy – Start with 3-5% and adjust as needed
- Create a healthcare funding plan – It’ll probably cost more than you think!
- Protect against inflation – Your retirement could last decades
- Consider guaranteed income sources – Social Security, annuities or other stable income streams
Common Mistakes to Avoid
I’ve seen too many retirees make these errors:
- Taking a lump sum distribution and paying unnecessary taxes
- Investing too conservatively and not keeping pace with inflation
- Spending too much too early in retirement
- Not planning for healthcare costs
- Failing to adjust their strategy as circumstances change
Final Thoughts
There’s no single “best” thing to do with retirement money because everyone’s situation is unique. The key is creating a personalized strategy that balances your need for current income, future growth, and protection against risks like inflation and healthcare costs.
Remember, retirement isn’t the end of your financial journey – it’s just a new phase that requires different strategies. Regular reviews with a financial advisor can help you stay on track and adjust as needed.
What are you planning to do with your retirement money? Have you found strategies that work particularly well? I’d love to hear your thoughts in the comments!
This article is for informational purposes only and should not be considered financial advice. Always consult with a qualified financial advisor regarding your specific situation.
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