401(k) balance growth comes with retirement planning pitfalls: advisors

Gregory Hutchison, 72, resides most individuals’s retirement dream. After an almost 44-year profession as an professional in data expertise at IBM, Hutchison retired in 2021 with near $1 million in his 401(k).

He and his spouse offered their house and downsized to a smaller home by the water in Snow Hill, Maryland, the place he likes to go boating.

“I do not stay a lavish life, however I’ve sufficient to exit to dinner each night time, if I wish to, with my spouse,” he mentioned.

Even so, Hutchison mentioned he needs he had consulted with a monetary advisor sooner. “There’s a lot you do not know — the taxes, bills are coming from locations you did not know existed,” he mentioned.

“I obtained fortunate,” he mentioned of his financial savings. “The inventory market was rising.”

Thanks partially to market beneficial properties, staff have extra of their 401(okay)s than ever earlier than.

Helped additionally by options like auto enrollment and auto escalation, common retirement account balances elevated greater than 10% in 2025, in accordance with latest reviews by Fidelity Investments and Vanguard.

Whereas amassing an sufficient nest egg is undoubtedly an excellent drawback to have, it will probably include challenges, monetary advisors say — particularly for households that save with out a lot thought to diversifying retirement belongings throughout various kinds of monetary accounts.

There are just a few easy guidelines of thumb for retirement planning, akin to saving 10 times your earnings by retirement age and the so-called 4% rule for retirement earnings, which means that retirees ought to have the ability to safely withdraw 4% of their investments, after adjusting for inflation, annually in retirement.

Nonetheless, these are solely tough tips. It may be tough to zero in on a particular “magic number” to retire comfortably — which may lead some households to “radically” underspend after they’re youthful as a way to sock away as a lot retirement financial savings as doable, mentioned David Blanchett, a CFP and head of retirement analysis for Prudential Monetary.

In contrast to different financial savings targets, akin to for a four-year college degree, the size of 1’s retirement is finally unimaginable to know, Blanchett mentioned.

Whereas it is totally different for everybody, most savers are stunned at how far their sources will go relative to their working years as soon as payroll taxes and 401(okay) contributions are now not deducted, Jeter mentioned. For instance, somebody making $100,000 a yr might solely want $75,000 annually in retirement, he mentioned, a few of which can come from Social Safety.

For some, having a lot cash in retirement accounts is usually a double-edged sword if they’ve few different belongings to tap in an emergency.

Current reviews present extra cash-strapped savers have raided their nest eggs. In reality, 401(okay) hardship withdrawals hit a record high final yr, in accordance with Vanguard, which tracks 5 million accounts.

Most monetary specialists advise in opposition to withdrawing cash from an employer-sponsored retirement plan, because it usually comes at a value — notably, a steep 10% penalty, together with state and federal earnings taxes.

Underneath excessive circumstances, savers can take a hardship distribution with out incurring an early withdrawal charge if the cash is getting used to cowl a certified expense, akin to a medical invoice, loss on account of pure disasters or to purchase a major residence or forestall eviction or foreclosures.

Even then, monetary advisors suggest in opposition to raiding 401(okay)s or individual retirement accounts early, if doable, because it basically means shortchanging your retirement.

Joon Um, a CFP at Safe Tax & Accounting in Hayward, California, mentioned a lot of his purchasers are excessive earners who did a “nice job maxing out their 401(okay)s and IRAs, however ended up a bit ‘retirement wealthy however money poor.'”

When Los Angeles wildfires destroyed parts of the Pacific Palisades and other neighborhoods last year, some needed to dip into retirement financial savings, he mentioned.

“It isn’t all the time straightforward to make use of that cash instantly” due to taxes and penalties, Um mentioned. “It is a reminder that whereas retirement accounts are nice for long-term financial savings, it is also necessary to have some versatile financial savings exterior of them for sudden occasions or if somebody needs to retire sooner than deliberate.”

There are additionally methods for early retirees to entry sure retirement financial savings early with out incurring a tax penalty. Nonetheless, they could be a bit nuanced, monetary planners mentioned.

For instance, when you depart your organization at age 55 or later — however earlier than age 59½ — you possibly can take distributions from employer-sponsored retirement plans with no penalty as a result of “rule of 55,” Lawrence Pon, a CFP and authorized public accountant based mostly in Redwood Metropolis, California, wrote in an e mail.

IRA homeowners can make the most of substantially equal periodic payments — often known as 72(t) distributions, Pon mentioned.

“This takes cautious planning, and there are lots of guidelines to observe,” he mentioned.

That is as a result of required minimal distributions, or RMDs, that retirement savers must take from their pretax accounts after they hit a sure age — no matter whether or not they want the cash.

“We run into purchasers on a regular basis that did a incredible job saving, however all of their financial savings are pretax, they usually have earnings pressured upon them,” Patrick Fontana, a CFP based mostly in Dallas, wrote in an e mail.

Typically, that earnings is way more than they should stay on, forcing households into larger earnings tax brackets and so-called IRMAA funds, Fontana mentioned. These “income-related month-to-month adjustment quantities” can cause Medicare premiums to rise.

The issue could be “even additional compounded” for married {couples} if one partner passes away, because the required distributions sometimes keep roughly the identical however the surviving partner is topic to single tax charges, “that are a lot worse,” Fontana mentioned.

Having financial savings unfold throughout various kinds of monetary accounts with totally different tax remedy — like Roth 401(okay)s and IRAs, and taxable brokerage accounts along with pretax retirement financial savings — can scale back such challenges. It can provide folks extra choices to attract earnings, and assist scale back their general tax burden.

Savers who earn an excessive amount of to make direct Roth IRA contributions can nonetheless make the most of a Roth 401(k) if their firm presents one. They will additionally weigh so-called Roth conversions. This entails altering pretax funds to Roth cash, which comes with an upfront tax invoice however has the advantage of tax-free withdrawals in retirement.

Whereas having over-saved could also be extra helpful than not, some purchasers specific remorse about whether or not they need to have traveled extra extensively or helped their kids buy a home, as an example, Jeter mentioned.

“Loads of them saved diligently, however there is a paradox: Did I save an excessive amount of?” Jeter mentioned.

Many staff purpose to just do that. The FIRE motion — which stands for Monetary Independence, Retire Early — is constructed on the concept dealing with your cash tremendous effectively can assist you attain monetary freedom earlier.

“Folks in FIRE speak about saving 80% of their earnings. However what is the enjoyable in that?” mentioned Blanchett, of Prudential Monetary. “I do not know I would name it a threat, nevertheless it’s fairly shut.

“I feel it is necessary to have a steadiness,” he mentioned.