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You know all about saving in your 401(k) while you’re working, but how exactly should you handle those savings when you retire?
If you’re not sure, join the crowd.
A quarter of 401(k) participants 45 and older say they don’t know what they’ll do with their retirement account when they retire, according to a survey of 1,000 people with a 401(k) account conducted for Cerulli Associates, a research and consulting firm.
Another 25% said they’ll ask their financial advisor what to do, which is another way of saying they’re not sure what to do.
The best approach depends on your situation. Following these four steps can help you get started.
One key question in retirement is how you’ll create an income stream — that is, a retirement paycheck — from your savings. If your 401(k) lets you set up regular withdrawals or an installment payment plan, then it might make sense to keep your money in the plan.
A growing number of employers allow retiring workers to say, “Pay out X dollars per month,” says Steve Vernon, author of “Retirement Game-Changers” and a research scholar at the Stanford Center on Longevity.
But 401(k) plans vary widely. Some allow lump-sum disbursements only. Others might offer partial withdrawals, but the number is limited. If and when you need periodic payments, you’ll need an account that allows that. If your 401(k) doesn’t, consider rolling your savings over to an individual retirement account. See this for more on this process.
There are additional reasons to consider a rollover to an IRA. While you’re taking a look at your 401(k) distribution options, jot down any fees you’re paying — both investment expense ratios and plan administration fees. Ask your employer for details if you can’t find the information.
Generally, a mutual-fund expense ratio that tops 1% is too expensive. Ideally, you should be paying much less — closer to 0.20% or so.
Can’t find a low-cost fund in your plan? Proceed to the next step.
When deciding whether your existing 401(k) or an IRA is the best choice for you, consider these questions:
If you’re employed at a large company, there’s a good chance your 401(k) has some low-cost investment options. A 401(k) that combines low costs with robust payout options and investment choices could be a great place to keep your money, even after you retire.
But if your 401(k) has limited payout options, high administrative fees or inferior investment choices, consider an IRA.
“One big reason why a lot of clients want to move their money from a 401(k) into an IRA is that the flexibility of investment options as well as distribution options kind of goes through the roof,” says Matt Ventura, a senior wealth advisor at Exencial Wealth Advisors, a fee-only planning firm in Frisco, Texas.
Relatedly, if you’ve got savings spread out over a variety of 401(k) and other accounts, consider rolling those assets into your current plan or a new IRA.
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Let’s return to the question of your retirement income stream. Specifically, you’ll want to consider where your monthly income will come from and how much of it will be from your savings. Also, you'll want your retirement income to exceed your expenses, so you’ll need to estimate your retirement expenses. Here’s .
Then, you’ll need to figure out which accounts to tap first, and how much to take. One idea? Take a page from the IRS and use their formula for required minimum distributions from retirement accounts. For more on this strategy, read our story on .
Also, consider delaying your Social Security benefits. Every month you delay claiming Social Security, your monthly benefit rises. If you delay claiming your benefits until age 70, you’ll collect the highest monthly payout possible.
Social Security “is the best retirement income you can get,” Vernon says, because your benefits are indexed for inflation and are guaranteed non-volatile income.