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As 401(k) balances swell, financial advisors warn of retirement planning pitfalls
While a big retirement account balance is a good problem to have, it can come with challenges, financial advisors say.
TL;DR
- Large 401(k) balances can lead to a "retirement rich but cash poor" situation.
- Big balances can trigger significant required withdrawals, resulting in tax and Medicare (IRMAA) consequences.
- Diversifying savings across Roth, taxable, and pretax accounts improves flexibility and tax management.
- Hardship withdrawals from 401(k)s are costly due to penalties and taxes, and should be avoided if possible.
- The "rule of 55" and 72(t) distributions offer ways to access retirement funds early with careful planning.
- Having savings spread across different account types can reduce overall tax burden in retirement.
- Some regret saving too much, questioning missed opportunities for travel or helping family.
- The FIRE movement's extreme savings rates may detract from enjoying life and finding a balance.