Growing 401(k) balances come with retirement planning pitfalls: Advisor

Gregory Hutchison, 72, is living most people’s retirement dreams. After a nearly 44-year career as an information technology professional, IBMHutchison retired in 2021 with nearly $1 million in his 401(k).

He and his wife sold their house and downsized to a small house on the water in Snow Hill, Maryland, where he likes to go boating.

“I don’t live a luxurious life, but I have enough money to go out to dinner with my wife every night if I wanted to,” he said.

Still, Hutchison said he wished he had consulted a financial advisor sooner. “There’s a lot of things you don’t know. Taxes and expenses are coming from places you didn’t know existed,” he said.

“I’ve been lucky,” he said of his savings. “The stock market was growing.”

Thanks in part to market gains, workers have more 401(k)s than ever before.

According to a recent report from Fidelity Investments and Vanguard, the average retirement account balance increased by more than 10% in 2025, thanks in part to features like auto-enrollment and auto-escalation.

Accumulating an adequate nest egg is definitely a good problem to have, but it can come with challenges, especially for households that save without giving much thought to diversifying their retirement assets across different types of financial accounts, financial advisors say.

“Nobody really talks about the math. It’s save, save, save,” said Robert Jeter, an advisor and certified financial planner at Back Bay Financial Planning & Investments in Bethany Beach, Delaware.

There are some simple rules of thumb for retirement planning, such as saving 10 times your income by retirement age. and the so-called 4% retirement income rule, which suggests that retirees should be able to safely withdraw 4% of their investments after retirement, adjusted for inflation.

However, these are only rough guidelines. It can be difficult to zero in on a specific “magic number” for a comfortable retirement, which may cause some households to “radically” cut back on spending early in life in order to drain as much of their retirement savings as possible, said David Blanchett, CFP and director of retirement research at Prudential Financial.

Blanchett says that unlike other savings goals, such as getting a four-year college degree, it’s impossible to know ultimately how long you’ll be in retirement.

While everyone’s situation is different, Jeter says most savers are surprised by how much their assets grow relative to their years of service once payroll taxes and 401(k) contributions are no longer deducted. For example, a person earning $100,000 a year may only need $75,000 each year in retirement, but some of that may come from Social Security, he said.

Having a large amount of money in a retirement account can be a double-edged sword if there are few other assets available in an emergency.

Recent reports suggest that more cash-strapped savers are raiding their nest eggs. In fact, 401(k) hardship withdrawals hit an all-time high last year, according to Vanguard, which tracks 5 million accounts.

Most financial experts are against taking money out of employer-sponsored retirement plans. This is because there are often costs such as state and federal income taxes plus a hefty 10% penalty.

In extreme circumstances, savers can take hardship distributions without incurring early withdrawal fees if the funds are used to cover eligible expenses such as medical expenses, natural disaster losses, purchasing a primary residence, or preventing eviction or foreclosure.

Still, financial advisors recommend against raiding your 401(k) or personal retirement account early on, if possible, because doing so means essentially starving your retirement funds.

Jun Um, a CFP at Secure Tax and Accounting in Hayward, Calif., said many of his clients are high-income earners who “maxed out their 401(k)s and IRAs and did great jobs, only to end up in a ‘retirement rich but cash poor’ situation.”

He said some people had to draw down their retirement savings when the Los Angeles wildfires destroyed parts of the Pacific Palisades and other areas last year.

Because of taxes and penalties, “it’s not always easy to spend that money right away,” Um said. “This is a great reminder that while retirement accounts are great for long-term savings, it’s important to have flexible savings outside of retirement accounts in case something unexpected happens or you want to retire earlier than planned.”

There are also ways for early retirees to access some retirement savings early without being taxed. However, financial planners say they can be a little nuanced.

For example, if you leave your job after age 55 (but before age 59 1/2), the “age 55 rule” allows you to take penalty-free distributions from your employer-sponsored retirement plan, Lawrence Pong, a CFP and CPA based in Redwood City, Calif., wrote in an email.

IRA owners can take advantage of substantially equal periodic payments, also known as 72



Source link