Watching your 401(k) cross the $1 million mark is a real accomplishment. 

It may represent 30 or 40 years of contributions, company matches, market growth, and the discipline to keep saving along the way. At some point, the focus shifts from how much you’ve accumulated to what those savings can actually do for you. 

How much will be available to spend after taxes? Where will your retirement income come from? How should the money be invested once you’re withdrawing instead of contributing? And what happens to whatever you eventually leave behind? 

Let’s take a look at a few of those questions. 

Your 401(k) Balance Isn’t All Spendable Income 

If most of your retirement savings are in a traditional 401(k) or IRA, the balance you see on the statement is tax-deferred money.  

Recently, we were looking at someone’s sizable traditional 401(k) and talking through what taxes could mean for the account. In that discussion, we estimated that $1 million in the account might translate to roughly $650,000 to $700,000 of after-tax spending power over time. 

That isn’t a universal calculation. Your actual taxes will depend on factors such as when and how much you withdraw, your other income, filing status, future tax rates, and potentially state taxes. 

But the example helps illustrate something that can be easy to overlook while you’re accumulating: $1 million of tax-deferred retirement savings isn’t necessarily $1 million available to spend. 

Imagine you want $100,000 from your traditional 401(k) to pay off your mortgage. Depending on your tax situation, you might need to withdraw $140,000 or $150,000 to end up with the $100,000 you actually need. 

Taxes should be part of the income conversation before you start taking larger withdrawals. 

What About the 4% Rule? 

You may have heard of the 4% rule as a starting point for retirement withdrawals. 

The basic concept is that a retiree begins by withdrawing around 4% of a portfolio in the first year of retirement and then adjusts that amount for inflation in subsequent years. It can be a useful rule of thumb when you’re trying to get an initial idea of how much income a portfolio might support. 

But a starting point still needs to be applied to your life through retirement. 

Your spending may change more than once in retirement. You have your own mix of Social Security, pensions, investments, and retirement accounts. Taxes affect what you get to keep, and healthcare expenses can change over time. 

So rather than stopping at “I have $1 million, and 4% of that is $40,000,” we want to build out what retirement income actually looks like for your household over time. 

RMDs Can Change the Tax Picture Later 

Tax-deferred retirement accounts also come with another consideration: required minimum distributions, or RMDs.  

Under current law, the age when RMDs begin depends on when you were born. Once RMDs apply, the IRS requires you to withdraw a calculated amount from certain tax-deferred retirement accounts each year, and those distributions can create taxable income. 

That makes the years before RMDs begin worth paying attention to. Taylor Wolverton, our Director of Financial Planning and Tax Strategy, takes the time to explore Roth conversions as a possible strategy for our clients in those “before” years. 

A Roth conversion moves money from a tax-deferred retirement account into a Roth account. You recognize taxable income on the amount converted today in exchange for moving those dollars into an account where qualified withdrawals can later be tax-free. 

Whether that tradeoff makes sense depends on your circumstances, including your current and expected future tax situation. We recently covered RMDs and Roth conversions in much more detail, including the applicable ages and planning opportunities, if you’d like to dig further into that topic. 

Your Investment Strategy Has a Different Job in Retirement 

While you’re working, you may be contributing to your 401(k) every couple of weeks and investing with a long time horizon. 

Retirement changes that equation because eventually money starts coming out instead of going in, and where that money comes from brings sequence-of-returns risk into the conversation. If you need retirement income from growth investments while the market is down, you may have to sell more shares to generate the same amount of cash. Those shares are no longer invested when the market eventually recovers. 

We’ve talked about sequence-of-returns risk before with annuities. Here, we’re looking to prepare a retirement portfolio around that possibility. One approach we use is our three-bucket strategy: cash, growth, and income/safety. 

Cash is available for near-term needs. The growth bucket is invested in the market for longer-term growth. The income/safety bucket is designed to help cover your needs and some wants through retirement without relying entirely on the growth bucket for regular income.  

The idea is to give different portions of your savings different jobs. After decades of asking your 401(k) primarily to grow, retirement may require some of those dollars to start doing something different. 

Don’t Forget the Surviving Spouse’s Tax Return 

There’s another tax-planning issue that can be easy to miss when both spouses are healthy and planning retirement together. 

Eventually, one spouse may be filing a tax return alone. 

You may hear this referred to as the “widow’s penalty.” After one spouse dies, the survivor may eventually move from married filing jointly to filing as a single taxpayer. The household may lose one Social Security benefit, and keep the higher of the two, but the survivor can still have substantial income from retirement accounts, investments, pensions, and other sources. 

At the same time, single tax brackets and other tax thresholds differ from those for married couples filing jointly. 

That combination can create a very different tax picture for the surviving spouse. 

This is another area Taylor models when evaluating longer-term tax strategies with clients. For a married couple considering Roth conversions, for example, it can be useful to model not only their taxes today but what taxes could look like if one spouse is eventually filing alone. 

That doesn’t automatically mean converting more money today is the answer, but a surviving spouse’s potential tax situation deserves a place in the analysis. 

What Happens to the Money You Leave Behind? 

Your retirement accounts may also outlive you, which brings us to another planning consideration. 

Under current rules, many non-spouse beneficiaries who inherit a 401(k) or IRA generally must empty the inherited account by the end of the 10th year following the original account owner’s death. The specific distribution requirements can depend on the beneficiary and the circumstances. 

That makes your beneficiary designations and the tax characteristics of the assets you leave behind worth reviewing as part of your estate plan. 

Start with the basics. Who are your primary and contingent beneficiaries? Do those designations still reflect your wishes? And how might inheriting a tax-deferred account affect the people receiving it? 

There can also be more advanced planning opportunities. 

For example, there may be circumstances where an adult child who inherits retirement assets considers disclaiming some or all of an inheritance so the assets can pass to the next beneficiary, possibly a young grandchild. Different situations, like the inheritor’s income, can create different tax considerations. 

Qualified disclaimers and inherited retirement accounts come with specific rules, deadlines, and requirements. This is the kind of strategy you’d want to explore with the appropriate professionals rather than trying to navigate on your own. 

You Saved the Money. Now What Do You Want It to Do? 

There’s an emotional adjustment that comes with retirement after spending decades as a saver. You’ve trained yourself to put money into your accounts, leave it there, and watch it grow. Then retirement arrives and asks you to start using those savings to support your life. 

Having a plan for the money can make that transition easier to navigate. 

We bring up our ROUTE process a lot in these articles, and this topic is a good example of why. In talking about what to do with a $1 million 401(k), we’ve already touched on most of the 5 areas: Risk Management, Optimize Income, Taxes, and Estate Plan. Unified Healthcare rounds out the process when we look at the broader retirement picture.  

Whatever you’ve accumulated for retirement, the next phase is figuring out how your savings, income, investments, taxes, healthcare, and estate plan can work together for the retirement you want. 

If you’d like to explore what that could look like with your own 401(k), IRA, and retirement income, visit pomwealth.net to schedule a complimentary conversation with our team. We can look at what you have in place and start working through what you want that money to do for you.