Should I cash out my 401K? Try hiring a financial adviser, reducing your living expenses and refinancing your home.
Q: I am a 49 year old who plans to retire from my current job by age 55. My 401(k) is now worth $1.1 million, which is up 20 percent since January. It is invested in several different mutual funds. I also have another $975,000 in a combination of my company’s stock and various other stocks.
My question is about the 401(k). I would like to know if it makes sense to turn all of it or half of it into cash since it the account is currently worth so much and then buy it back when the market takes a hit?
It is so tempting to try to cash in at least part of it since it took 25 years of investing to get the account to its current level. I am worried if I don’t do something, the market will take a dive and it will go back down to the $700,000 range.
I’m also wondering if when I do turn my 401(k) into cash if I should pay off my remaining home loan balance.
A: Congratulations on creating a serious level of financial security for yourself. You’ve got roughly $2 million in investable assets and hope to retire from your current company in about 6 years.
What you’re asking is whether it’s okay to try and time the market. In general, that never works. Some folks try it and get lucky (or not) and perhaps you’ll be one of the few that gets it right. Sell now, when everything is at the high (or so you think) and then buy it back when the market takes a hit. Surely, you could sell some and see what happens.
But we think you’re focusing on the wrong issue. What happens when you hit 55? Sure, you retire from your company, but the odds favor you living well into your late 80s, or another 30+ years. You’ve got years to let your $1.1 million recover, should there be a problem in the stock market and if they’re in mutual funds they’re hopefully well-diversified.
Here’s a bigger problem: You’ve got nearly half of your cash in your company stock and what sounds like a handful of other companies. That’s a far bigger risk.
While publicly traded companies can be solid investments, there’s always a possibility of an Enron, where undercover shenanigans can kill a company and its stock overnight. Or, there’s a Lehman, which traded near its all-time high within 30 days of essentially going out of business. Or, you have a great company like Microsoft or Intel, whose stock essentially stops moving even though the companies are cash cows because someone on Wall Street no longer considers them to be growth industries.
Having a great deal of your financial wealth concentrated in just a few companies is dangerous. Most financial advisors will tell you that you should limit holdings in any one company (especially your employer) to 10 percent or less of your total investable assets (excluding your home equity).
The other part of the equation is what you plan to do at 55. Will you leave the working world forever, kick back and play golf? Are you planning on traveling the world? Or, are you going to take another job or start a company?
On the home front, will your house be paid off? Will you sell it and move to someone less expensive? Will you stay and buy a vacation home in a warm-weather or recreational location?
Each of these goals will require some level of funding, and you may even require more cash if you retire early and then wind up having to pay for health insurance for 10 years until you qualify for Medicare at age 65.
You have a lot of money (which is great) and a lot of unanswered questions (at least in this email). I think you should find a great financial planner who can help you walk through various scenarios, help you explore what it will cost you to live the way you want after you retire from your current company, and then come up with an investment strategy that will get you where you want to go.
In the meantime, the smartest move you can make is to figure out how to reduce your living expenses when you’re retired, as that will increase your cash flow and give you the most options. If you haven’t refinanced your home recently, you should consider doing so. For someone with your financial strength, we’d recommend refinancing into a 10-year loan (currently available at less than 3 percent), and then focus on getting it paid off by the time you officially retire.
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