Vanguard warning: Retirees are making costly mistakes with their 401(k)s
Throughout your career, you are consistently encouraged to contribute to an employer-sponsored 401(k) plan. That is certainly a positive habit.
Your company may have automatically enrolled you as a new hire and annually increased your contribution rate.
Once you reach retirement, transitioning away from that “save at all costs” mentality can prove difficult. Approximately 4 in 10 retirees hold portfolios that are either excessively aggressive or overly conservative for their current stage of life.
According to recent research from Vanguard, 25% of retirees had more than 80% of their balance in equities, while 16% held less than 30%—a range described as “potentially misaligned for most retirees.”
Retirees with balances of $1 million or more were three times as likely as those with smaller accounts to maintain an aggressive allocation, keeping over 80% of their funds in stocks.
“This shows how haphazard individual <a Tyson Sprick, a <a 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."
The process of converting retirement savings into a reliable income stream to fund living expenses after leaving the workforce remains a significant hurdle for most retirees.
Maintaining too high a concentration in stocks can be detrimental if the market declines early in retirement, yet holding too little can make it difficult to combat inflation over a 25- or 30-year period.
“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 serve as a “set it and forget it” strategy, investing your savings based on a chosen retirement year—for instance, when you reach 67, the full retirement age for most people. As you age, the fund automatically adjusts the portfolio, moving assets from stocks into more stable options like cash and bonds.
Leaving it alone
Most retirees also refrain from touching their accounts once they stop working. Roughly 8 in 10 retirees had not taken any distributions from their plans, and only 7% received regular installment payments.
