The Missing 401(K) Strategy That Could Make or Break Your Retirement
For many Americans, a 401(k) balance represents their largest source of retirement income outside of Social Security.
Yet a recent survey conducted by Nuveen and the TIAA Institute found that most workers spend far more time thinking about how to build savings than how they'll actually use those savings once paychecks stop.
Find Out: 2 Years on Social Security Paychecks: Does It Cover the Basics?
You’re Savvy: 11 Subtly Genius Things All Wealthy People Do With Their Money — That You Should Do, Too
The survey found that only 22% of participants have thought "a lot" about their withdrawal strategies. This is especially jarring given how much money is on the line — across the U.S., 80 million workers are saving into 401(k) plans and have accumulated more than $8 trillion in assets.
Here's why having a withdrawal plan is essential and how to create one that works for you.
Why a 401(k) Withdrawal Strategy Matters in Retirement
When it comes to your 401(k), saving is only half the job.
"The other half — figuring out how to turn that savings into a paycheck that actually lasts — is something most people have never seriously thought about," said Brendan McCarthy, head of retirement investing for Nuveen.
The survey found that nearly half of workers couldn't correctly answer a single question about retirement withdrawals.
"That's not just a knowledge gap; it's a financial risk," McCarthy said. "The money you've worked decades to save can disappear faster than you expected if there's no real strategy guiding how you spend it. A withdrawal plan is the difference between a retirement you designed and one that just happens to you."
How Longevity Risk Can Derail Retirement Savings
One of the biggest retirement mistakes is underestimating how long your money may need to last, yet the survey found that two-thirds of 401(k) participants did not know the average life expectancy of a 65-year-old.
"Those who get it wrong tend to guess short — by years, sometimes by a decade," McCarthy said. "That matters enormously, because if you're planning for a 15-year retirement and you actually live 25 years, your money doesn't get a second chance."
A man who retires at 65 should plan for a 20-year retirement, while a woman should plan for a retirement that lasts nearly 22 years.
"A withdrawal plan that doesn't account for that reality isn't really a plan," McCarthy said.
How To Build a Retirement Income Plan From Your 401(k)
While every retiree's needs are different, McCarthy said that the most effective withdrawal plans start with the same question: How much guaranteed income will you have each month?
"Then ask yourself: 'Is that enough to cover the basics?'" he said. "For most people, the honest answer is no."
That gap is where a thoughtful plan comes in.
"A portion of your savings can be converted into a guaranteed monthly income stream, essentially rebuilding the pension that most workers no longer have," McCarthy said. "Layer that on top of Social Security, keep some savings liquid for emergencies and discretionary spending and you've created something that actually functions like a retirement income strategy, not just a pile of money hoping to last."
The key is not waiting until the day you retire to figure this out.
"The earlier you start thinking about income, not just balances, the better positioned you'll be," McCarthy said.
Why the 4% Rule May Not Be Enough
The withdrawal strategy that works for one person might not necessarily work for you.
"The traditional 4% withdrawal rule has its place," McCarthy said. "But it assumes a lot goes right and it leaves out the most powerful tool most retirees have access to: the ability to convert a portion of savings into guaranteed income."
If you annuitize a third of your savings and apply a 4% withdrawal to the rest, research shows you can generate roughly 30% more income in your first year of retirement than with withdrawals alone.
"That said, what the right percentage looks like for any individual depends on their health, their other income sources, their expenses and their family situation," McCarthy said. "The rule of thumb gets you in the ballpark. A real plan gets you home."
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
More From MoneyLion: