I’m 59 With $1.3 Million in a 401(k). How Do I Make Sure This Money Lasts the Rest of My Life?

Managing your money properly in retirement is critical for ensuring that it lasts as long as you do.

For example, imagine you have $1.3 million in a 401(k) before age 60. While this is a considerable amount, a 4% withdrawal rate would only generate $52,000 per year. You’d also run the risk of running out of money by the time you turn 90.

So for someone looking to retire in a few years, what can they do to make sure this size portfolio lasts the rest of their life? While some people relish the challenge of answering this question themselves, many stand to benefit from working with a financial advisor who can build them a custom retirement income plan based on their assets and spending needs.

This question raises an issue called “longevity risk” – the risk that you will outlive your savings.

Managing longevity risk is sort of like playing a hand of poker. You know some of the details, like how much you have in savings. You can control others, like how much you spend each year. But you can’t know everything, particularly how long you will live.

As Steve Davis, CEO of Total Wealth Academy puts it: “There is no expiration date on the bottom of your foot.” The standard advice is to overestimate how long you’ll live and manage your money accordingly. Then again, a financial advisor can also help you build a retirement plan that seeks to mitigate longevity risk.

It’s important to anticipate and project how much your 401(k) could be worth by the time you need to start withdrawing from it. At age 59, an investor still has nearly a decade before they reach full retirement age (FRA) – the point at which they’re eligible for full Social Security. While plenty of people retire before FRA, it’s a logical retirement age for many.

For example, say that you’re 59, plan to retire in eight years and your 401(k) is invested in an S&P 500 index fund. If the market were to average a 10% annual return over the next eight years, your portfolio could grow to $2.78 million by retirement. This is before accounting for any ongoing contributions that you’d potentially make in the coming years. By contributing $30,500 per year – the most a person 50 and older can contribute to a 401(k) in 2024 – your portfolio could be worth as much as $3.13 million by age 67 if the market averaged 10% each year.

This doesn’t mean you should plan for these specific returns. Volatility and risk management are real issues. People nearing retirement also tend to shift toward more conservative investments, so returns could be significantly lower. The point is to plan around what your portfolio likely will be worth by the time retirement arrives. If you need help aligning your retirement portfolio with your need for growth or capital preservation, consider connecting with a financial advisor.

How much will you collect in benefits each year? This information is available to everyone even before retirement through the Social Security Administration’s website, where you can see your current statement. 

The more money you earn during your working life, the higher your Social Security benefits will be (up to the program’s cap). Increasing your Social Security benefits is an excellent way to make your retirement account last. Since this is a lifelong, inflation-adjusted income, the more you collect in Social Security the less you’ll presumably need to withdraw from your portfolio. 

Among other ways to increase your benefits, you can get a part-time job if you currently earn less than the program’s cap ($168,600 in 2024). If possible, you can also increase your lifetime benefits by waiting to claim Social Security. Doing so will boost your benefits by up to 8% per year until age 70, at which point your benefits will max out. Both of these strategies can indirectly extend the life of your portfolio.

Keep in mind that a financial advisor can help you plan for Social Security and integrate your benefits into a comprehensive income plan for your golden years.

Then there’s the question of how to manage your portfolio. 

With a $1.3 million 401(k) at age 59, you have any number of options. As noted above, a 4% drawdown from a balanced portfolio could generate $52,000 in your first year of retirement although you may need to withdraw more to cover your spending needs until you’re eligible for Social Security.

Some households can do better than this though. In particular, Davis said retirees who want to prioritize longevity might consider income-based investing.

 “I have a client who saved over $5 million and still ran out of money before he died,” he said. 
“You must build a second stream of income just like Warren Buffett said. An income stream that lasts whether you live 10 years or 50 years in retirement.”

An income portfolio operates without drawing down on your underlying principal. Instead, it relies on assets like annuities, interest-bearing securities, dividend stocks and income properties. This creates a retirement income that can, in theory, last indefinitely because you never sell the underlying assets themselves. 

Matt Willer, a partner with Phoenix Capital Group Holdings, said retirees can also think about rolling their 401(k) into an IRA. This can open up several investment opportunities that the structure of a 401(k) doesn’t offer.

“The self-directed IRA account type has more investment latitude and you can start looking at assets outside of the markets,” he said. “Tactically, I’d look at a basket of private assets that aren’t market correlated, from different industries, that provide yield and preferably also find some with the compounding option.” 

This does require careful risk balancing, though. After all, there’s a reason that everyone doesn’t just do this. More secure income assets, like bonds and dividend stocks, tend to produce low yields due to their valuable reliability. Less secure assets, like income-generating properties, need a strategy to offset potential volatility. Long-term income assets, like annuities, may require you to hold growth assets elsewhere in your portfolio to offset their inherent inflation risk. All of these assets are valuable, but none are a silver bullet.

Meanwhile, a financial advisor can help you evaluate whether income investing is a suitable approach for you based on your goals and assets.

Finally, retirement comes with its special tax concerns.

Retirees who rely on pre-tax accounts like 401(k)s and traditional IRAs need to anticipate both income taxes and required minimum distributions (RMDs). When you take withdrawals from a portfolio like a 401(k) or an IRA, you must pay income taxes on the full amount. This taxable income can also affect the taxes you pay on Social Security benefits for the year. As a result, consider pre-tax income like a salary. You only get to spend the after-tax amount. 

For income investors, RMDs pose a specific challenge. Even if you plan to build an income portfolio in your 40(k) and only withdraw the income it produces, you cannot do so indefinitely. You must take out a minimum amount every year under RMD rules. You can move those assets to a taxed portfolio (that is, you can change the category of the portfolio in which they’re held without selling them), but you must take the withdrawal and pay taxes.

There are several ways of dealing with this, one of which is simply to budget the cash for taxes. However, as Willer said, age 59 still gives you plenty of time to incrementally move your money into a Roth account.

“I give serious consideration to then doing an annual Roth conversion given the relatively young age of 59,” he said. “Take this step in pieces so as not to vault yourself into a higher tax bracket. Ultimately, you can get all of your assets into a Roth whereby the cash flow from the yield is completely tax-free.”

This strategy does involve paying taxes on the money you convert each year that you make a conversion. However, it can save you from paying taxes on your income and withdrawals in retirement, which will help extend the lifespan of your portfolio considerably. And if you need help doing Roth conversions or figuring out how much to convert each year, consider working with a financial advisor.

There’s no simple formula for managing longevity risk. Making sure your retirement portfolio lasts your whole life involves balancing risk and goals. Income investing, a strategy that lets your portfolio generate income without drawing down on the underlying principal, is one way to mitigate longevity risk.

• Asset allocation, or the strategic mix of asset classes and investments in a portfolio, can help you manage and reduce longevity risk. SmartAsset’s asset allocation calculator will give you a recommended mix of stocks, bonds and cash based on your risk tolerance.
• A financial advisor can help you mitigate different risks, including the possibility that you run out of money. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

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