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Making It Automatic

Richard Quinn, 1:59 am ET

ONE OF THE TOUGHEST financial challenges most people face—second only to accumulating enough for retirement—is deciding how to convert those funds into retirement income. Especially when the goal is to never run out of money.

I pride myself on being informed. This morning, I received my comeuppance. I was reviewing my 401(k) account, which is administered by Fidelity Investments. I had taken my required minimum distribution for 2021, but was exploring other ways I could withdraw money.

Since I designed and managed the plan from its 1982 inception until I retired in 2010, I thought I knew it all. But things can change in 11 years. I discovered that Fidelity offers periodic withdrawal options that can effectively turn my account into an annuity—without me having to turn over a pile of cash to an insurance company.

The options are numerous. I can set my withdrawals on a monthly, quarterly or annual schedule. I can take withdrawals for a fixed number of years. I can withdraw a fixed percentage of my money every year. I can even take withdrawals based on my estimated life expectancy. In all cases, my withdrawals would be adjusted so I meet my required minimum distributions.

As I weigh my options, I can also can get estimates of my future account balance for any age I select. I also get to choose the market performance I want used in my projections—average, below average or significantly below average.

The fixed-percentage withdrawal option defaults to the traditional 4%, but that can be changed. The 4% is a fixed percentage of the account’s value that’s withdrawn each year, so there’s no guarantee the amount will keep pace with inflation. But given the projected market value of my holdings, increased payments seem virtually assured.

Like me, I suspect that many plan participants don’t know about all their options. They’re described a few levels down on the plan’s website. That’s too bad, because they could be very helpful to retirees who are trying to stretch their funds over the next 25 years or so.

In 2020, there were about 600,000 401(k) plans. They have about 60 million active participants, plus millions more former employees and retirees. That’s a lot of people who need to make their money last while meeting their retirement goals. Automatic withdrawal options, like those offered by Fidelity, could be a big help.

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Mitch D
Mitch D
8 months ago

Fidelity does not allow automatic or even online withdrawals from specified funds within 401(k) or 457 accounts. That option apparently is allowed only for IRAs. Withdrawals from a specified fund within a 401(k) or 457 can be done by telephone with a Fidelity representative. At least this has been my experience.

wtfwjtd
wtfwjtd
8 months ago

Good discussion of a much-overlooked topic Richard. While floods of information is readily available on how to set up automatic IRA and 401k investments, the amount of info about withdrawals is tiny by comparison. I was aware that the government’s TSP offers several withdrawal options like you discussed, but the critical flaw with the TSP is that it does not allow you to specify which fund to make withdrawals from. This leaves you stuck with a one-size-fits-all compromise that could be forcing you to liquidate funds at inopportune times. So, while I consider the TSP a fabulous accumulation vehicle, it is, shall we say, less than optimal for the withdrawal phase.
Your article inspired me to do some digging, and apparently Fidelity, TDAmeritrade, and probably others also offer multiple IRA (as well as 401k!) withdrawal options, without the flaw of the TSP. You can specify your withdrawals from any fund you are invested in, or cash. This allows you to safely and effectively “annuitize” your IRA! Great to know this, and even though the form is a little complicated, it is doable.
https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/automatic-investments-mrd-life-expectancy.pdf

R Quinn
R Quinn
8 months ago
Reply to  wtfwjtd

My plan doesn’t allow selection of which fund to withdraw from either. It’s always been proportional to total investments. I think it’s an administrative thing.

William Perry
William Perry
8 months ago

Thank you for the post. I hope you will comment on your decision to leave money in your 401(k) vs. rolling a over to a IRA to save 401(k) fees. I am delaying my rollover to be able to continue deferring my 401(k) age 72 RMDs as I am still working. Thanks!

R Quinn
R Quinn
8 months ago
Reply to  William Perry

The fees are very low and given there are fees no matter where I just didn’t bother. But I suspect the real reason is an irrational attachment to the plan I started and managed for nearly thirty years. I’m rethinking that now as I want to consolidate investments.

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