Retirees And 401(k)s: Big Money, Big Decisions

For many, it will be the biggest chunk of money they will ever see. And and that makes the consequences of doing the wrong thing huge.

We're talking about the money they have accumulated in their company-sponsored 401(k)s as they approach retirement. And we're talking huge numbers. Consider:

• The nation's 75 million Boomers are retiring at a rate of one every nine seconds through 2029, says John Piershale, wealth adviser at Piershale Financial Group in Crystal Lake, Ill.
• Baby Boomers have an average of $147,000 in their 401(k)s, according to Fidelity Investments. That number jumps to $285,000 for Boomers who have been saving in their 401(k) for 10 consecutive years.
• An estimated $324 billion was moved out of 401(k)s and into Individual Retirement Accounts in 2013, and that is expected to grow to $500 billion by 2019 as that retirement wave intensifies, according to Cerulli Associates, a Boston-based research firm.

So now the big question. You've done well in your 401(k) over the years, so why not just leave it where it is when you retire?

"This is the biggest decision of your life," says Dave Richmond, president of Richmond Brothers financial advisers in Jackson, Mich. "Lots of times (the value is) bigger than your home."

Yet, most people have given little thought to what they will do with the money when it's time for them to retire.

"Our general recommendation is when someone retires to move that money into an IRA so they have access to it rather than have to call their employer for the money when they need distribution," says Joe Heider, managing principal of Ohio region for Rehmann Financial. One problem with leaving it with your former company: There may be lags in the availability of your funds, he says.

"With the amount of money flowing out, an IRA provides the structure to keep it tax free," Heider says. "You have a lot more investment flexibility, so you can tailor that IRA around your particular needs."

"We like people to roll over into an IRA because it finalizes the severance from their employer," says Andy Smith, senior vice president at the Mutual Fund Store and co-host of the Mutual Fund Show.

John Bucsek, managing director of MetLife Solutions Group, says the number of choices in the IRA is a big reason to roll over your retirement savings. "Normally in a 401(k) I can have 10 to 15 choices (of mutual funds)," he says. In an IRA those choices become virtually unlimited. Some people, for example, feel variable annuities are an important part of retirement planning. But those options are almost never available in a 401(k), he says.

John Sweeney, executive vice president, retirement and investing strategies at Fidelity Investments, adds, in a rollover to an IRA, you get "the flexibility" of investment options and also guidance. "In some places, like Fidelity, (you can) walk into any office and get guidance about planning, how to structure your portfolio for income distribution."

Also, Piershale says, moving your money makes estate planning easier. "If you pass away and leave your money in a 401(k), there are options, but they are limited. If you roll your money into an IRA, it's so much easier. Your employer is not in the business of estate planning."

And while some people may feel secure just leaving their money in their 401(k)s, there are additional reasons to consider a rollover into an IRA.

1. Use the opportunity to get your financial planning team in place. "Looking at a momentous time like going into retirement gives you a great chance to pause and plan," Richmond says. "Get your financial adviser, the person who does your taxes and make sure your retirement team is intact and all working for the same goal, to make sure you have gold in your golden years."

2. Do a retirement plan. Remember, your life is changing. You are probably going from a savings phase, to a distribution phase in your life.

Get a sense of what your income needs will be in retirement. "Spending will change. Savings will change. Your mortgage will change. Figure out how Social Security will be implemented into your retirement distribution plan," Smith says.

" People should work with an adviser," Heider says. "There are certainly situations where individuals may be very savvy and could do it themselves. (But) most people are far better served with an adviser. You seldom see attorneys represent themselves because they are too close to the matter. People get the same way about money."

3. Make sure your beneficiaries are up to date. "Beneficiary planning is so huge," Richmond says. "Once you die, there is no changing beneficiaries.

"Especially in a blended family, beneficiaries are not always up to date," says George Hunter of Hunter Capital in Columbia, Md. "By rolling over (into an IRA), you update your beneficiary." Some 401(k) plans are restrictive to who can benefit."

"We have to take a look at retirement in four phases," Bucsek says, "having enough money to retire, having enough money to stay retired, having enough to protect yourself against long-term care, and the fourth is transitioning your assets (after death) as orderly as possible. When someone gets them and is not supposed to, that is not good."

"Bring in someone who can help you make a decision," Hunter says. "Generally, the best decision is to roll that money into an IRA. It becomes more than mutual funds in an account. It becomes your future and the future of your wife and kids. And it becomes your long-term care insurance."