5 Mistakes Retirees Make with Their 401(k)

Mistake #1: Leaving It in a Default Allocation

Many retirees leave their 401(k) in whatever allocation was set years ago. A portfolio designed for a 40-year-old is not appropriate for a 65-year-old. As you approach retirement, your allocation should shift toward capital preservation and income generation.

Worse, some people leave their 401(k) with a former employer and forget about it entirely. These 'orphaned' accounts often sit in conservative default funds earning minimal returns.

Mistake #2: Taking a Lump Sum Without a Plan

Getting a big check from your 401(k) feels great — until the tax bill arrives. A lump-sum withdrawal can push you into a higher tax bracket, costing you 22-37% in federal taxes alone. If you're under 59½, there's an additional 10% penalty.

Instead, consider a direct rollover into an IRA or annuity. This avoids immediate taxation and gives you more control over when and how you withdraw the money.

Mistake #3: Ignoring Required Minimum Distributions

Starting at age 73, you must take Required Minimum Distributions (RMDs) from your traditional 401(k) and IRA. Miss an RMD and the penalty is 25% of the amount you should have withdrawn. We help clients set up automatic RMD schedules so this never happens.

Mistake #4: Not Considering Roth Conversions

The years between retirement and age 73 (when RMDs start) are often your lowest-income years. This creates a window for Roth conversions — moving money from your traditional 401(k) to a Roth IRA at a low tax rate. The money then grows tax-free forever.

Mistake #5: Not Rolling Into Guaranteed Income

A 401(k) can run out. An annuity can't. Many retirees would benefit from rolling a portion of their 401(k) into a fixed index annuity with an income rider, creating a guaranteed paycheck for life while keeping the rest in flexible accounts.