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The 401K fine line....when and how much?

Started by Leigh, September 24, 2018, 07:10:10 AM

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Leigh

My spouse has a very healthy 401K and we have ridden out the worst of the storms over the past several years. It is professionally managed.

This weekend, I finally gave into some feelings of 'autumn jitters' and asked that they change his retirement date from 66 to 65 (from 3 years to 2 years basically), move us from moderate investors to conservatively moderate and...dump the 2% of his company's stock and invest in something else since we already have what I consider to be too much company stock.

Retirement and a coming correction....
What a bust it could be to have both co-mingle!

Anybody else looking at the light at the end of the tunnel and knowing it's time to pull in the aggressive investing?  That timing thing is tough! 

Sam

This is such a great topic. If he is really retiring in two years or three years, please, please, take down your risk exposure. After such a great run, unless you actually need a much greater return to retire comfortably, there is no point taking on excess risk at his age and stage.

I wouldn't have more than 50% of my portfolio in equities if I was him.  I probably have closer to only 30% in equities, 50% in bonds now that rates have risen, and 20% in cash to look for opportunity.

Does he have any other retirement benefits coming to him? Social Security is available, is there a pension?
Regards,

Sam

Jon Sharpe

I agree with Sam. If you've already reached your target 401k balance than I would dial back the risk substantially. There is much more downside than upside risk at this point and each year that gap widens. And by the way - congratulations on reaching the finish line (almost)!

Sam

Just a heads up that I will be publishing my after-tax investment amount guide in October. Something to really look out for that compares your pre-tax amounts and post-tax amounts in order to retire early.
Regards,

Sam

Money Ronin

Leigh, I think you are doing the right thing.  For most people, they need to lower their risk profile as they enter retirement.  However, I'd like to offer some unconventional advice since the readers of Financial Samurai are not exactly average.

If you have been an aggressive saver (like many people on this forum), your funds may outlast your retirement.  Alternatively, perhaps you have a great pension.  For example, I know a few government employees who have a healthy pension, social security, rental property income and after-tax and pre-tax stock accounts.  In such situations, they have sufficient income to cover normal expenses, so I think it makes sense to invest more aggressively since their effective timeline for tapping those funds may be never.  I've recommended such friends to treat their investment portfolio like an endowment fund for future generations or charitable causes.

For me personally, my goal is to live primarily off of my rental income (not there yet) and my stocks will continue to be invested aggressively.  I hope to maximize appreciation and pass those assets on tax free when I pass away (either to spouse, heirs or charities).  I don't plan on tapping into them so I don't mind if they drop in value temporarily.

One word of caution regarding pre-tax IRAs and 401Ks.  Whereas most assets receive a step up in tax basis upon the owner's death, pre-tax assets do not.  That means your heirs will be forced to withdraw from the inherited IRA/401K over a set schedule and pay income taxes.  One solution is to donate these assets to charity before you donate other assets.

Sam

My after-tax investment amounts by age guide has been published: https://www.financialsamurai.com/after-tax-investment-amounts-by-age-to-retire-early/

If he wants to retire earlier, he really needs to build as Much after-tax income/Investments as possible.
Regards,

Sam

bf312

Quote from: Jon Sharpe on September 24, 2018, 03:05:57 PM
I agree with Sam. If you've already reached your target 401k balance than I would dial back the risk substantially. There is much more downside than upside risk at this point and each year that gap widens. And by the way - congratulations on reaching the finish line (almost)!

Leigh, I don't have the specifics of your situation or your risk tolerance, but I am going to generally disagree with Sam and Jon here. Life expectancy continues to climb in most places in the US. Many will face the reality of 30-35 years in retirement. In those cases you'd be losing out on a lot of capital appreciation with an equity allocation as low as 50% as you and your spouse approach retirement. Given increased life expectancy most portfolios would have more than enough time to recover from any market correction or recession.