Experts explain how to avoid becoming cash poor with a 401k retirement

In an effort to be prepared for ever-increasing retirement costs, it’s possible to save too much money in your 401(k) account, tying up liquid assets.

This can leave you “cash poor” in retirement – ​​a condition in which you cannot easily access the funds you need for emergencies, travel, major expenses and even regular living expenses.

Experts explain some ways to avoid this outcome and achieve financial balance.

Diversify your savings

Although savings will occur in a 401(k), contribution limits will most likely put a ceiling on savings goals, said Hao Dang, investment strategist at Consilio Wealth. This means that most people will need other savings options while contributing to their retirement.

“The downside to putting all your retirement savings in a 401(k) is that the distributions are taxed at normal income rates,” Dang says. “Raising large amounts of money in a given year can prove costly.”

Instead, consider diversifying your contributions among savings vehicles. He advised, “A Roth IRA, an HSA, and even a regular taxable account can help provide optional options in the future.”

A robust emergency fund

Chad Gammon, a financial planner at Arnold and Mote Wealth Management, said that while saving for retirement is crucial, it’s just as important to have enough money for immediate needs.

“The first strategy is to have an adequate emergency fund,” he continued. “This fund is usually equivalent to six to twelve months of living expenses in a highly liquid account. This would be comparable to a high-yield savings account or a money market (account).”

Long-term growth accounts

Additionally, Gammon pointed out that investing in long-term growth accounts outside your 401(k) can prevent you from running out of available cash.

Gammon added: “A brokerage account offers more liquidity than retirement accounts and offers a wide range of investment options, along with potential tax benefits. It is wise to consult a financial advisor or tax professional to discuss these strategies in more detail.”

Save taxes efficiently

As a certified financial planner (CFP) and retirement planner at Discovery Wealth Planning, Chris Urban said that as you build wealth, you ideally want to save and invest in accounts with different tax treatments.

For example, he said, good tax diversification might mean having a pre-tax account, such as a traditional 401(k) and/or IRA, and an after-tax account, such as a Roth 401(k) and/or Roth IRA. and a taxable brokerage account.

“(If) you are currently in the lowest or highest marginal tax bracket – and plan to be – then it may not make the most sense to spread out your contributions,” Urban continued.

“But once you retire, you will have much more flexibility in withdrawing your assets – spending your money – in a tax-efficient way if you have assets to draw on in accounts with different tax treatment.”

This allows for more effective management of tax brackets, Roth IRA conversions, and so on, in the years when your income is reduced.

“This approach also serves as an effective hedge against tax law by giving you the most flexibility and options,” he said.

Diversify your investments

Diversifying your investments is also crucial, says Justin Godur, financial advisor, CEO and founder of Capital Max.

“Consider a mix of stocks, bonds and mutual funds that offer both growth potential and liquidity,” Godur said. “This strategy not only provides financial flexibility, but also mitigates the risks associated with market volatility.”

Catch up on contributions

Plus, taking advantage of catch-up contributions can boost your 401(k) without holding on to excessive amounts.

“Contributing up to the maximum amount while ensuring that part of your savings remains liquid provides a safety net for unforeseen circumstances,” Godur continues.

Conduct a regular assessment

You should also regularly review your financial plan to adjust the balance of cash and retirement funds as your needs change.

According to Reagan Bonlie, the founder of Nudge Money and former JP Morgan wealth manager, “Life circumstances can change and your financial strategy should adjust accordingly.”

Avoid punishments

If you take money out of your 401(k), Bonlie warned that you should expect early withdrawal penalties.

“In general, it’s best to avoid making withdrawals before age 59.5 unless absolutely necessary,” says Bonlie.

Consider a HELOC

If you own your home, a Home Equity Line of Credit (HELOC) can be a useful backup source of liquidity, Bonlie shares.

“It is not intended for regular expenses, but can be useful in emergency situations without disrupting your retirement accounts.”

Balancing your liquid cash and 401(k) requires careful planning and consideration of your unique financial situation.

By diversifying your liquid assets and strategically planning your withdrawals, you can ensure you have access to funds when you need them, while still benefiting from growing your retirement accounts.

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