5 Ways to Convert Your 401(k) to Fund Your Retirement Like a Pension

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The number of companies that offer pension plans has dwindled significantly over the past several years. Employees have traditionally loved pension plans because, upon retirement, they guarantee a monthly payment from the plan that will carry them through retirement.

Nowadays, very few companies offer pension plans, and 401(k) plans are taking their place. There are a few distinct differences between the two plans. For example, pension plans are defined benefit plans, and 401(k) plans are defined contribution plans.

In a pension plan, investment risks are the burden of the plan provider, while in a 401(k) plan, the investment risks are those of the employee. While the 401(k) plan may not sound quite as advantageous as a pension plan, one day it may fund the majority of your retirement. Therefore, it is critical to participate in the 401(k) plan offered by your employer.

How to Make a 401(k)-to-Pension Conversion

If you are heading toward retirement and aren't sure exactly the right game plan for the money in your 401(k), here are five tips that will help you make the most of these valuable assets:

1. Leave the money in your plan. If you can get by without the money in your 401(k) immediately, don’t start withdrawing your money right away. Remember, this money is tax-deferred until you begin withdrawing it and then you will be taxed upon distribution. You have until the age of 70.5 before you will be required to take Required Minimum Distributions (RMD). A penalty will occur if you don't take your RMD, so be sure that this doesn't fall through the cracks.

2. Withdraw only 4 percent to 5 percent each year. If you want to start withdrawing your funds, you should only withdraw small amounts, especially if your 401(k) is your primary source of income. The more assets and retirement income you have, such as rental properties or a part-time job, the more you can afford to withdraw. Stretching out your 401(k) by only withdrawing small amounts is hugely beneficial.

3. Have an emergency fund. It’s easy to dip into your 401(k) when there’s an emergency, but ideally, it is a much better plan to have an emergency fund. Your emergency fund should consist of six months of cash or liquid investments that you can tap into any time in the case of an unforeseen circumstance or event.  

4. Plan for how you are going to use your 401(k) money. Different options work better for different scenarios, so consider speaking to a financial advisor that will help you select the best course of action to meet your goals. Remember that you can continue to maximize your plan after retirement by changing investments, making sure that your 401(k) is meeting your financial goals, and keeping your stock portfolio strong.

5. Assign a beneficiary. Because a 401(k) is a retirement account, you can assign a beneficiary to receive benefits, such as your spouse. This will ensure that your nest egg will still benefit your loved ones upon your passing.

Protecting Your 401(k) Assets

There are a few simple ways that you can protect your 401(k) assets. After all, no matter how savvy you are at investing, there is no way to predict if the market is going to go up or down, or what our economy is going to look like several years from now.

To roll with the stock market tide and feel comfortable that your investments will do well in the long term, here are a few essential things to keep in mind:

  • Diversify your portfolio. It’s not ideal for 100 percent of your portfolio to be invested in stocks, so be sure to diversify your assets. That way, if the stock market takes a hit or goes through a correction, the rest of your portfolio can compensate for those affected areas.
  • Remember that corrections are temporary. Keep in mind that the volatility of the market will always affect your assets to some degree. Corrections are normal and temporary.
  • Invest for the long term. No matter how close you are to retirement, think about how sustainable your investments are long term. Stick to a sound investment strategy so your money will never run out.
  • Meet with a financial advisor. Schedule regular meetings with your financial advisor to ensure that you are an active participant in the process of managing your portfolio.

Are you interested in more information on how your 401(k) can be a significant source of income in retirement? If so, contact a qualified financial advisor that can help you.