The 401(k) Decision People in Their First Year of Retirement Regret the Most

The first year of retirement seems surreal when you're in it. Most people spend decades working and preparing for their retirement years. Finally getting there can feel exciting, but a bit stressful. Suddenly, you go from having a steady paycheck and knowing how much income you'll have each month to being in charge of your 401(k) retirement plan and your withdrawals.

Many people regret mismanaging their 401(k) funds in their first year of retirement, which can affect their financial fitness for years. Here is more about this mistake many retirees make and how to avoid it.

The top retirement regret: withdrawing too much, too soon

One of the biggest regrets new retirees have is withdrawing too much in their first year. Typically, retirees plan to live on less in retirement, with the hope that they'll meet other goals that make that possible, such as paying off their mortgages.

Typically, financial experts recommend the 4% rule, which says to withdraw 4% of your total retirement portfolio during your first year. However, a report from Charles Schwab says that the 4% rule might not work for everyone.

Why the 4% rule might not work for all retirees

Though the 4% rule has been a standard for decades, the experts at Schwab say it can be problematic as it assumes a 30-year retirement, which not everyone will need. It also applies to a specific type of portfolio that's 50% stocks and 50% bonds. Finally, it doesn't take into account taxes or fees, which might necessitate a bigger withdrawal.

Why a drawdown strategy is necessary for retirement

Many retirees regret over-withdrawing in their first year because they didn't make a drawdown strategy. Over-withdrawing can be harmful for a number of reasons. For example, if you retire early and are under age 59.5, you could be subject to early withdrawal fees. If you're over 59.5, and you withdraw too much, it could also negatively affect your income taxes by bumping you up into a higher tax bracket.

When making a drawdown strategy, consider what you'll do in the event of a market downturn early in retirement. Over-withdrawing in your first year, especially during economic upheaval, can negatively impact your future withdrawals, too.

RMD changes may impact your withdrawal strategy

Another consideration for many retirees is the required minimum distribution (RMD) age. As of 2026, the RMD age is 73, where in previous years, it was 72. Many retirees choose to leave money invested as long as possible in their 401(k)s and only withdraw when they're required to by law. This is possible if you have other types of retirement income, such as a pension, Social Security, IRA accounts, or small business or rental income.

If you're not sure what order to withdraw your retirement accounts, speak to a licensed financial planner who can help you find out whether or not you're on track for retirement and how much you should withdraw the first year.

Unexpected extra costs that may impact your retirement

Most people don't overwithdraw during their first year of retirement because they're being indulgent. It's that retirement sometimes costs more than people realize. Take healthcare, for example. According to Fidelity, retirees age 65 and up will spend over $170,000 on healthcare expenses during retirement. It can be challenging to predict what your healthcare needs will be, and unexpected expenses or diagnoses can derail even the best retirement plan.

A few simple ways to maximize your retirement income

If you're concerned about your nest egg or you'd like more income in retirement, many retirees do go back to work, even on a part-time basis. According to a recent survey, as many as one in eight retirees will head back to work, whether because they feel like they need a sense of purpose or because their finances require it.

Your first year of retirement will be one of transition. Ideally, practice living on the income you plan to have in retirement a few years prior to leaving the workforce. This can help you learn to monitor your expenses, live on a budget, and simplify your bills. If you find that you miss working or the camaraderie of having co-workers, working part-time may help. Additionally, turning a hobby into a business, helping to watch grandchildren, or volunteering are other ways to find fulfilling work that doesn't drain expenses.

Don't discount the impact of 401(k) fees

When you're planning your withdrawal strategy, one way to determine which funds to keep and which funds to allow to compound is by looking at the fees. Unfortunately, 401(k) fees and fund fees can be hard to find. Financial companies typically deduct their fees before you earn money on your investments, so it's easy to miss the impact they have. By taking the time to understand the fees in your retirement portfolio, you can better understand which funds you'd like to keep and which you might prefer selling first.

Here's where to go to ask retirement planning questions

If you're in your first year of retirement, you don't have a human resources department to turn to for questions about your 401(k) plan. However, you can call your 401(k) plan provider and roll your 401(k) into an IRA at a brokerage firm, which will have customer service representatives available to help. You can also work with a financial planner, who can advise you on which accounts to draw from first, how much you should withdraw, and how to make your retirement funds last.

Bottom line

Many people try to ensure their retirement plan is stress-free. After working for a lifetime, having full days to do whatever you please seems like a dream. However, the first year of retirement can be a time of transition, and sometimes retirees overwithdraw from their 401(k)s. That's one of the biggest regrets people have when they retire, and something younger workers can learn from.

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