Make sure your portfolio is diversified
It’s not necessarily a wise idea to cash out a retirement plan in its entirety. Even if it’s a small balance and you’re not looking at such a large tax hit, remember that employer plans like 401(k)s get to grow on a tax-deferred basis. So if you cash out your entire balance, you’ll lose out on that opportunity.
Rather than rush to put all of your money into savings, take a look at how your retirement account is invested. You’ll specifically want to look at two things – your portfolio’s risk profile and the extent to which your assets are diversified.
If you have 100% of your Vanguard portfolio in stocks, that’s not great, and you may want to move some of that money into other assets, which we’ll get into in a minute. But having up to 50% of your assets in stocks during retirement may be perfectly safe provided you have the rest of your money in more stable assets, plus at least a year’s worth of expenses in cash.
If you’re comfortable with the percentage of your Vanguard account that’s in stocks, see how you’re actually invested. If you have a 401(k) from a previous employer, your money is likely in a variety of funds (or a single one), as opposed to individual stocks, since those aren’t usually an option in a 401(k). IRAs, by contrast, allow you to hold stocks individually.
If all of your money is in small cap stocks, that’s a risk right there. But if you have a nice mix of small, medium, and large-cap stocks, you’re pretty nicely spread out. Similarly, if you have the stock portion of your portfolio in an S&P 500 index fund, you’re pretty well diversified by virtue of that alone, since it means you’re invested in the 500 largest publicly traded companies.
But if you’re not sure, sit down with a financial adviser and ask them to review your portfolio with you. They may be able to make recommendations that help put your mind at ease.
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Learn MoreCreate a municipal bond ladder
It could make sense to move some of your money out of an employer retirement plan if you’re worried about a stock market crash and want to branch out. And if you’re concerned about taxes, it could help to choose a tax-friendly asset like municipal bonds.
Municipal bond interest is always federally tax-exempt and if you buy municipal bonds issued by the state you live in, you may not have to pay state or local taxes, either.
What makes municipal bonds particularly attractive for retirees is that they’re a fairly stable asset offering a predictable interest income stream and whose value doesn’t tend to fluctuate the same way stock values do.
The financial planning firm Carty & Co reports that about 72% of municipal bonds are owned directly by individuals or through mutual funds, and that two-thirds of those owners are over 65.
If you like this strategy, take it one step further with a municipal bond ladder. All this means is buying a series of bonds with varying maturity dates.
This could allow you to reinvest your proceeds as your bonds mature at potentially higher yields, depending on how rates trend.
Open an immediate annuity
With an immediate annuity, you pay an insurance company a sum of money, and in return, you're guaranteed regular payments for a preset period of time (and potentially for life). If you have funds you're looking to withdraw from a retirement plan, you could use that money to open an immediate annuity and set yourself up with predictable income. Also, like traditional 401(k) plans, annuities grow tax-deferred.
That said, when you put money into an annuity, you give up control of the funds used to open it. And an immediate annuity may result in much lower returns than what stocks would give you.
A 2024 Schroders retirement survey found that inflation was the top concern among Americans, and that specifically, 89% worry about inflation eroding the value of their assets.
If that’s a concern of yours, then an immediate annuity may not be optimal.
However, if you’re more worried about stock market volatility than inflation and you want the peace of mind that comes with guaranteed payments, then an immediate annuity is probably worth considering.
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