401(k) balance growth comes with retirement planning pitfalls: advisors
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Gregory Hutchison, 72, is living most people’s retirement dream. After a career of approximately 44 years as an information technology specialist IBM’sHutchison retired in 2021 with close to $1 million in his 401(k).
He and his wife sold their home and moved to a smaller house on the water in Snow Hill, Maryland, where he loved boating.
“I don’t live a lavish life, but I have enough money to go out to dinner with my wife every night if I want,” he said.
Still, Hutchison said he wished he had met with a financial advisor sooner. “There are so many things you don’t know; taxes and expenses come from places you don’t know exist,” he said.
“I was lucky,” he said of his savings. “The stock market was growing.”
Thanks in part to market gains, workers have more 401(k)s than ever before.
According to recent reports, average retirement account balances are up more than 10% in 2025, helped by features like auto-enrollment and auto-escalation. Loyalty Investments and Vanguard.
While accumulating an adequate nest egg is undoubtedly a good problem to have, financial advisors say it can come with challenges, especially for households that save without giving much thought to diversifying retirement assets across different financial account types.
How much should you save for retirement?
“Nobody really talks about the math. It’s savings, savings, savings,” said Certified Financial Planner Robert Jeter, an advisor with Back Bay Financial Planning and Investments in Bethany Beach, Delaware.
There are a few simple rules of thumb for retirement planning; Saving 10 times your earnings by retirement age and the so-called 4% rule for retirement income suggest that retirees should be able to safely withdraw 4% of their investments each year in retirement, after adjusting for inflation.
These are just rough rules, though. It can be difficult to focus on a specific “magic number” to retire comfortably That could lead some households to “radically” underspend when they’re young in order to spend as much of their retirement savings as possible, said David Blanchett, CFP, head of retirement research at Prudential Financial.
Unlike other savings goals, such as a four-year college degree, it’s ultimately impossible to know one’s retirement longevity, Blanchett said.
While it’s different for everyone, many savers are surprised at how far their resources can go over their years of work when payroll taxes and 401(k) contributions are no longer deducted, Jeter said. For example, someone making $100,000 a year might only need $75,000 each year in retirement, some of which could come from Social Security, he said.
Why do you need a ‘bucket’ strategy for savings?
For some, having so much money in retirement accounts can be a double-edged sword if they have few other assets. touch in case of emergency.
Recent reports suggest cash-strapped savers are raiding their nest eggs. In fact, 401(k) distressed withdrawals hit a record high last year. PioneerFollowing 5 million accounts.
Most financial experts recommend not withdrawing money from an employer-sponsored retirement plan because it often comes at a cost; specifically state and federal income taxes, as well as a hefty 10 percent penalty.
Under extreme circumstances, savers may benefit from hardship distributions without paying an early withdrawal fee if the money is used to cover a qualified expense, such as a medical bill, losses from natural disasters, or to purchase a primary residence or prevent eviction or foreclosure.
Even then, financial advisors recommend not raiding 401(k)s or individual retirement accounts too early if possible, because that actually means shortening your retirement.
Joon Um, CFP at Secure Tax & Accounting in Hayward, Calif., said most of his clients are high-income earners who “did a great job maxing out their 401(k)s and IRAs, but ended up a little bit ‘retirement rich but cash poor.'”
When wildfires in Los Angeles destroyed parts of Pacific Palisades and other neighborhoods last year, some were forced to dip into their retirement savings, he said.
“It’s not always easy to use that money right away” because of taxes and penalties, Um said. “Retirement accounts are great for long-term savings, but it’s also important to have flexible savings in case unexpected events happen or someone wants to retire earlier than planned.”
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Nobody talks about math. Save, save, save.
Robert Jeter
Certified financial planner and advisor at Back Bay Financial Planning & Investments
There are also ways for early retirees to access certain retirement savings early without incurring a tax penalty. But these can be a bit subtle, financial planners said.
For example, if you leave your company at age 55 or later (but before age 59½), you can take distributions from employer-sponsored retirement plans with no penalty because of the “rule of 55,” Lawrence Pon, a CFP and certified public accountant based in Redwood City, Calif., wrote in an email.
IRA holders can benefit substantially equal periodic payments These are also known as 72
