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Your 401k is Not Retirement Income – and How Recognizing the Difference Could Save Your Nest Egg

November 14, 2019

If you are like many people in their working years, you dutifully make 401(k) contributions out of each paycheck and look at your account balance each quarter to make sure it is going in the right direction. You probably rebalance your investment options from time to time so your account is aligned with your goals. If your balance is keeping pace with those goals, you probably think you are “set” for retirement.

From the standpoint of having enough total assets to allow you to spend time with loved ones, travel, or do any of the other things you want to do in retirement, you might be right. That’s a good feeling. However, if you think your 401(k) account or other assets will automatically provide you with the income you need in your retirement years, think again. Up to the point of retirement, you have been – rightfully so – thinking about your account as an accumulation vehicle.

The problem is this: Many investors do not have an actionable plan in place to turn their retirement savings into those assets’ most critical function: Sustainable retirement income.

Understanding What’s in Your “Junk Drawer” of Assets

This problem is not limited to your 401(k) savings; it actually applies to all of your assets including other types of retirement accounts like 403(b)s, IRAs, Roth IRAs, life insurance policies, annuities, stocks and bonds, mutual fund investments, equity in your home, equity in vacation homes or other real estate holdings, certificates of deposit, and any other assets you’ve accumulated with the intention of using the assets after you retire. 

We call this your “junk drawer” of assets. Just like your junk drawer in your kitchen, it is usually messy and unorganized. It’s full of things you intentionally kept because they have value. However, finding what you’re looking for isn’t always easy. You can inadvertently cost yourself a lot of money by not structuring your “junk drawer” assets and not taking the time to understand how they will work for you in retirement – individually, as well as in concert with your other holdings. 

You could choose to ignore the problem and focus solely on the total number you see when you look at your personal balance sheet. However, doing so may come with significant side effects. 

  • Unnecessary taxes. When you don’t know how your assets are working for you or how each piece will factor into your retirement income stream, your portfolio is likely not optimized from a tax standpoint. This means you could be paying Uncle Sam and state/local tax authorities more than you need to.
  • Undue financial risk. Similarly, “junk drawer” assets are also likely not providing the protection you need against market volatility, potential corrections in the market, or even recessions.
  • Sequence of returns risk. When you retire and begin withdrawing money from your financial accounts periodically, you’re also subject to sequence of return risk. Without proper planning, factoring in the timing and types of accounts for withdrawals, the sequence of returns your accounts receive when taking income from them can seriously affect how long the principle will last. It also can affect how you feel about other types of risk as well.
  • Stress/health risk. If your financial accounts are not organized or optimized for retirement income, it’s not good for your stress levels. In turn, your health can suffer. Nobody should lie awake at night worried about whether they are paying unnecessary taxes or assuming unnecessary risks with their retirement savings.
  • Missed opportunities. In addition to the tangible financial costs and increased stress associated with unintentional “junk drawer” retirement strategies, you also risk missing out on opportunities and experiences. Being uncertain about your retirement income could cause you to not take a trip with your children or grandchildren or miss out on other outings or events with loved ones because of worry about how such expenditures would impact your bottom line. It could also mean you give less than you want to donate to the charitable causes you care most about.

Protect Yourself by Maximizing Your Financial “Junk Drawer”

The good news is that there are simple steps you can take now to avoid the risks outlined above. 

First, you cannot maximize or organize your assets until you know what is in the proverbial “junk drawer.” Start by inventorying what you have today. Gather statements and create a list, organizing your assets by type (i.e. real estate, investment accounts, insurance and annuities, physical assets, etc.) Be sure to also capture various sources of income. Get your retirement benefits statements (or estimates) from the Social Security Administration, your retirement account providers, pension plans, settlements, annuities, and any other sources of regular income. 

Next, evaluate your goals. What do you want to be able to do in retirement? For some retirees, their primary goal is traveling or spending time with family members. Others want to take up or revisit a treasured hobby. Your retirement goals are as unique as you are, so spend some time considering what your ideal retirement would look like. 

When you know what you have in assets and you know what you want to do with your money in retirement, it’s time to create an income plan to help reach those goals. This step involves organizing your retirement “junk drawer,” creating practical solutions and assembling an overall income strategy designed to help you reach your goals. The end result should be valuable peace of mind, knowing how each asset is working within your portfolio to support your retirement.

At CM&A Wealth Management, we understand the importance of organizing your retirement “junk drawer.” For more information on retirement income planning, check out