I’m Retired and Regret Investing in My 401(k) – Here’s Why

When it comes to funding their golden years, most Americans rely heavily on their 401(k) retirement accounts to make it happen. But for 67-year-old retiree Therese R., this widely accepted wisdom doesn’t JUST look. In fact, she has some regrets about dipping so heavily into her 401(k).

Here’s why one retiree regrets investing in her 401(k).

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The downside of being over-invested

“First, I have to say: I’m extremely fortunate that years of diligent 401(k) saving allowed me to retire quite comfortably,” the Phoenix resident said. “But I wish I hadn’t put so many eggs in that basket.”

Therese said having most of her net worth tied up in a 401(k) comes with some serious downsides that she didn’t fully understand when she was younger.

Penalty taxes are fed into withdrawals

“Any money I withdraw is paid at ordinary income tax rates,” she said. “When you’re retired, even slightly higher tax rates can add up to thousands of dollars lost each year.”

Therese estimated that she currently loses about 25% of each 401(k) distribution to federal and state taxes. That’s a large portion of the income she was counting from decades of contributing to those accounts.

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Mandatory withdrawals on Uncle Sam’s schedule

Another obstacle has Therese found? Lack of flexibility about when she can access her funds after she turns 72.

“I have to start taking mandatory minimum withdrawals from my 401(k) accounts whether I need that money or not,” she said. “It would be nice to leave more funds intact for a while to continue to mix.”

But under IRS rules, retirees must begin depleting their tax-advantaged retirement accounts on a strict schedule in their 70s. Failure to do so results in stiff penalties.

Access restrictions during Rocky Markets

During the intense volatility of the stock market, Therese also learned the hard way about the restrictions placed on accessing 401(k) funds.

“Because most of my net worth is tied up in my 401(k), there have been times in down markets where I can’t access that money as easily as I would like,” she said. “With more diversification in brokerage accounts, I would have more liquidity.”

While they offer great tax advantages over the accumulation years, 401(k)s have many rules around retirement distributions, which have been eye-opening experiences for Therese.

The story continues

“I’m not saying 401(k) investing is wrong by any means,” she said. “But I wish I had invested more in regular brokerage accounts and rental property as a hedge.”

Diversification of retirement income sources

Therese acknowledges the incredible value her 401(k) accounts have given her in retirement. But in hindsight, she would have invested less aggressively and invested more in alternative sources of income to supplement them.

“My advice to people younger than me would be to stay absolutely take advantage of 401(k) accounts and free money from any employer match,” she said. “But I’d also spread that money more into a Roth IRA account, a taxable brokerage account, and rental property if I can move them.”

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