Throughout your working years, you’re constantly pushed to save in an employer’s 401(k) plan. And that’s a good thing.
Your employer may have automatically enrolled you in the plan when you were a new hire and annually bumped up how much you set aside from your paycheck.
When you finally retire, it can be difficult to pivot from that save, save, save mindset. Roughly 4 in 10 retirees are invested in portfolios that skew either very aggressive or very conservative for their stage of life.
A quarter had more than 80% of their balance in equities, while 16% held less than 30%, a range “potentially misaligned for most retirees,” according to new research from Vanguard.
Retirees with balances of at least $1 million were three times more likely than those with lower amounts to have an aggressive allocation — keeping more than 80% of their balance in equities.
“This shows how haphazard individual investors can be with their retirement account allocations, [when] left to their own devices,” Tyson Sprick, a financial planner in Overland Park, Kan., told Yahoo Finance. “The numbers make it clear that a large number of retirement plan participants are in a suboptimal situation. Having a plan for decumulation is critical, and it should take shape years before actually retiring.”
Read more: Retirement planning by age: The complete guide for your 20s-70s
That process of shifting your retirement funds into a steady income stream to cover your living expenses after you stop working is a stumbling block for most retirees.
Keeping too much money in stocks can hurt if the market drops early in retirement, but too little can make it harder to keep up with inflation over 25 or 30 years.
“Many of today’s retirees may have started saving in their retirement plan prior to target-date funds being offered or serving as the investment default,” said Jeff Clark, head of defined contribution research at Vanguard.
“They’ve been self-directing their investment allocations throughout their career and may need to revisit whether their current allocation accurately reflects and supports their goals, income needs, and risk tolerance.”
Target-date funds are a “set it and forget it” vehicle to invest savings based on a retirement year you pick — say, when you turn 67, the full retirement age for most of us. The fund shifts an account’s investments from stocks to more fixed income and less volatile choices, such as cash and bonds, as you age.
Leaving it alone
Most of these retirees also do not touch their accounts once they exit the workplace. Roughly 8 in 10 retirees had taken no distributions from their accounts. Only 7% received regular installment payments.
To be fair, if you have other sources of income other than your 401(k), it’s not a bad idea to let those tax-deferred accounts keep compounding until you must take your first required minimum distributions (RMDs).
That’s the year in which you reach age 73. However, you can delay taking the first RMD until April 1 of the following year. If you reached age 73 in 2026, and you don’t take your first distribution this year, you must take that initial RMD by April 1, 2027, and the second RMD by Dec. 31, 2027.
“But those lower-income years can also be a great time to consider Roth conversions or other tax planning,” Sprick said. “The Vanguard numbers indicate a sizable swath of people who are not taking full advantage of that.”
Read more: How much do you really need to save for retirement?
To roll over or not to roll over
About half of retirees initially remain in their workplace plan after retiring, but many eventually roll over their savings to other accounts like an IRA, according to this research.
You can leave your money in your old employer’s plan, but the downside is that you can’t add any more money to it. And you’re limited to that roster of investments.
The upside: Employer-sponsored plans typically receive institutional pricing on investments. So they’re cheaper than the fees you might pay on the exact same mutual funds in your IRA, which are priced at retail. Even though you may not be actively contributing to the account, it may grow more than an IRA with the same investments and higher fees.
The case for a roll-over: A rollover provides greater control over your investments and flexibility. An IRA allows you to access a wider variety of investment options and then control the sale, rebalancing, and allocation across accounts and time.
When you roll your 401(k) account into an IRA, the company that administers the plan typically liquidates your holdings and then moves the cash into your IRA. But it doesn’t automatically invest it for you. That’s up to you.
How employers keep you in their plan
Recent retirees are more than 40% more likely to remain in their retirement plans when flexibility, such as partial and installment withdrawals, is offered, Clark said.
With an installment withdrawal from a 401(k), you take money out of your account in regular, scheduled payments rather than as a single lump sum.
About 7 in 10 Vanguard-administered plans allow retirees to take their funds out this way, but less than half permit spontaneous small withdrawals, say, to pay off a credit card.
Sprick’s advice to new retirees: Choose the account setup that makes it easiest for you to manage, whether it’s your former employer’s 401(k) or an IRA. “Keep enough cash or short-term bonds so you’re not forced to sell stocks in a downturn if you need the income to live on now,” he said. “Finally, revisit your allocation periodically.”
Kerry Hannon is a Senior Columnist at Yahoo Finance. She is a career and retirement strategist and the author of 14 books, including “Retirement Bites: A Gen X Guide to Securing Your Financial Future,” “In Control at 50+: How to Succeed in the New World of Work,” and “Never Too Old to Get Rich.
