Since 401(k) plans have become more popular with employers than pension plans, I have seen the same patterns repeated over and over in the years I've been in the business. Here are the ways I see people handle their 401(k) money. Most people I talk to fall into one of these categories.
- Tax avoider: Big incentive for him or her is to reduce tax burden while working. When no longer working, doesn't take anything out of qualified funds until has to take RMD's (Required Minimum Distributions) at age 70 1/2, and then only withdraws the minimum.
- Chicken Little: Looks at the money as protection from the sky falling. Again, only withdraws from this when 70 1/2 or has exhausted all other resources
- Rule follower--Follows the standard rule of many "experts" and takes out 5% per year so that the money will last through retirement (according to "the experts")
- Live fast, die young, leave a beautiful corpse: Either believes will die young or "the nursing home will take everything anyway", so spends a lot early in retirement, often buying new vehicles, paying off home, buying "toys" (motorcycle, boat, vacation home, etc.) and/or taking expensive vacations, often also paying for other family members.
Ever think about why 401(k) plans are sold, how they are marketed, and so on? It's to make money for the companies. Follow the money. That doesn't mean they are evil, or good, or anything in between. It means they are smart about money. Which means that they will do nothing that benefits you unless it also benefits them. It's not personal, it's business. And they will do things that will benefit them even if it doesn't help you, and maybe even if it costs you. How can they maximize their profits? BY HOLDING ON TO AS MUCH MONEY AS THEY CAN FOR AS LONG AS THEY CAN. Read that again. And again. And as many times more as it takes for it to really sink in. Follow the money.
Think about the four categories of retirees above. Three of them are maximizing the profits of the company holding the money. The one who isn't is probably also the one with the least amount in the 401(k) because of not saving as much as the other three and/or having taken money out along the way for things other than retirement. Follow the money. They have excellent marketing and sales departments. Paid for by the income gained by holding on to money for 20 or 30 or more years. Paid for by having 100% of the contributions, not the smaller amount that remains after all the taxes are taken out. Is it any wonder that they have entire departments devoted to getting people to keep their money where it is instead of moving it elsewhere when they leave a company? That their employees are trained to point out the tax consequences of withdrawing money? That across the board the company employees point to how much a person has in the account, not to how much income they can receive from the account? It's no surprise at all. If they encouraged you to take money out, they would be encouraging you to cut their pay. Follow the money.