Audiobook
Listen to Chapter 5
"A car is thirty thousand parts you're putting together."
— Mary Barra
Most autoworkers, no matter what division they're in, can agree with the simple fact that things tend to get more complicated over time. Whether it's the engine, touch display, product design, or supply chain, it's likely a bit more complicated than it was decades ago. Heck, you practically need a computer engineering degree to change the air in your tires now.
The same is true with investing. Today's world of investing is far more complicated than it was twenty or thirty years ago. The sheer number of investment types — stocks, bonds, annuities, alternatives, ETFs, mutual funds, closed-end funds, CDs, REITs, structured notes, buffered ETFs, private credit — and the strategies layered on top (active, passive, factor-based, dynamic, tactical, direct indexing) can be overwhelming.
A Tumultuous Stretch Since 2019
We've lived through all-time-low rates in 2020–2021, the most aggressive Fed tightening cycle in modern history (2022–2024), the worst combined year for stocks and bonds in decades (2022), and the beginning of a new rate-cutting cycle in 2024–2026. Traditional fixed income did not provide the stability it had for the previous thirty years, and many retirees got their first real lesson in sequence-of-returns risk.
Pension vs. Lump Sum: The Investment Impact
If You Take the Pension
Your monthly income will likely be covered by the pension combined with Social Security. This makes investing the 401(k) simpler — a nice diversified blend of stocks and bonds might do just fine.
If You Take the Lump Sum
You've transferred the investment risk to yourself. Now you need to invest it like your company would — diversified, focused on risk-adjusted return, not single-stock bets.
You may also look to incorporate an annuity, just as some of the larger companies have offloaded their pension liabilities to annuity companies (we discussed this de-risking trend in Chapter 2). This is the same exact thing, albeit on a much smaller scale. It reduces the investment burden you transferred to yourself by transferring some of it back to an insurance company.
There are rules of thumb that say invest your age in bonds and safe vehicles like a fixed or fixed indexed annuity. For instance, if you're 65, this would mean having 65% of your portfolio in fixed instruments. That's a starting point for a conversation, not a rule.
The Mountain — and the Climb Down
The Mountain Analogy
In retirement planning, we use the analogy of climbing a mountain. As you work, you save and save, eventually reaching the summit — your retirement. It took a lot of work to get there.
But you actually have to be more careful getting down the mountain.
Think about it: at retirement, you might have the most money of your entire life. Add in a pension lump sum, and this could double your life savings in an instant. A mistake at this point can be devastating — whether it's allocating too much to stocks, sitting on the sidelines with cash, or getting hit with a major loss in the first few years while also taking withdrawals.
Sequence-of-Returns Risk
Two retirees can earn the same average return over 30 years and end up with wildly different outcomes simply because of the order in which those returns arrived. A retiree who saw the 2022 bear market in their first year of retirement, while pulling income from their portfolio, faced a far harder climb than someone who experienced the same decline a decade later.
The climb down requires different gear than the climb up.
Should You Even Roll Over Your 401(k)? Slow Down First.
We live in a world optimized for speed. Social media refreshes instantly. Coffee comes in pods. Baseball even added a pitch clock. So when you retire, the instinct is to move fast: roll the 401(k) into an IRA, consolidate everything, check the box, and move on.
In some cases, moving too quickly can cost you real money — sometimes tens of thousands of dollars.And once the decision is made, there's often no going back.
Two Critical Reasons to Wait
The Rule of 55
If you separate from your employer at age 55 or older (but before 59½), the Rule of 55 lets you take withdrawals directly from that 401(k) without the 10% early withdrawal penalty. You'll still owe income tax, but the penalty disappears.
The catch: The moment you roll that 401(k) into an IRA, that benefit disappears. The 10% penalty comes back for any withdrawals before age 59½.
If you retire at age 55–58 and might need access to funds before 59½, consider leaving a portion in the 401(k) as a bridge until age 59½, then completing the rollover later.
Net Unrealized Appreciation (NUA)
If you hold highly appreciated company stock in your 401(k), NUA is a powerful tax strategy you can only use before rolling to an IRA. Once company stock is rolled into an IRA, the opportunity is gone — permanently.
NUA lets you pay ordinary income tax only on your cost basis (what you originally paid), and pay long-term capital gains tax — historically a lower rate — on the growth when you sell the shares later.
NUA Example: 10,000 Shares
Cost basis: $30,000 | Current value: $250,000 | Appreciation: $220,000
Roll Everything to IRA
- All $250,000 stays pre-tax
- Ordinary income tax on full amount when withdrawn
- Could be 22–37% on the appreciation
Use NUA Strategy
- Ordinary income tax on $30,000 basis only
- Long-term capital gains (0–20%) on $220,000
- Potential savings: ~$20,000+ in federal taxes
Important: NUA requires taking the entire 401(k) balance in a single tax year. Consult a qualified tax professional before executing.
How the Rollover Itself Works
Once you've thought through Rule of 55 and NUA questions, executing the rollover is straightforward — if done correctly. We recommend a direct rollover from the 401(k) to an IRA, meaning funds move institution-to-institution with no check cut to you. This avoids mandatory 20% tax withholding.
Don't Forget: Multiple Tax Buckets
Many 401(k)s contain different tax structures: traditional pre-tax, Roth 401(k), and after-tax contributions. You may need to open both a traditional IRA and a Roth IRA to complete a clean rollover. After-tax contributions can be rolled to a Roth IRA tax-free, but the gains on those contributions must go to a traditional IRA.
What's New: SECURE Act and SECURE 2.0 Changes
Major changes have reshaped how 401(k)s and IRAs work since 2019. If your retirement planning operates on pre-2019 assumptions, you're working with outdated rules.
Roth 401(k)s No Longer Have RMDs (2024+)
Under SECURE 2.0, Roth 401(k) accounts are no longer subject to required minimum distributions during the original owner's lifetime — matching Roth IRA treatment.
Catch-Up Contributions Must Be Roth for High Earners (2026)
If you're 50+ and earned over $145,000 (indexed) from your employer, catch-up contributions must be Roth beginning in 2026. Pre-tax catch-ups are no longer an option for higher earners.
529-to-Roth IRA Rollovers
Unused 529 plan funds can now be rolled into a Roth IRA for the beneficiary (up to $35,000 lifetime cap). A useful legacy-planning tool for grandparents with overfunded 529s.
RMD Ages Have Shifted Twice
RMDs now begin at age 73 (for those turning 72 between 2023–2032) and age 75 (for those turning 74 after 2032). More years for strategic Roth conversions before forced distributions.
Should You Consolidate Into One IRA?
Once you've decided to take the lump sum and roll your 401(k) over, should both go into a single IRA or stay separate?
For most retirees, consolidating into a single IRA is operationally simpler — one account to monitor, one statement, one beneficiary designation, one rebalancing decision. But there are exceptions:
- Retiring between 55–59½ and wanting Rule of 55 access? Roll only a portion at first.
- 401(k) has unique investment options (stable value fund paying above-market rates)? Sometimes worth staying.
- Using NUA on company stock? Basis goes to taxable account, rest to IRA, pension lump sum can consolidate or stay separate.
- Asset protection matters? 401(k)s generally have stronger federal creditor protection than IRAs.
Putting a Plan in Place
The Retirement Income Analysis
Before making any decisions, we can't stress enough the importance of having a solid retirement income analysis. As part of our Retirement Roadmap Review, we run projections both ways — taking the lump sum and not — and the results often look drastically different.
A thorough analysis answers three essential questions:
Can your money last?
We project whether your portfolio can sustain your desired income through age 95 or 100, factoring in inflation and other variables.
What rate of return do you need?
We use conservative assumptions — the difference between 7% and 5% is the difference between a plan that works and one that doesn't.
What might you leave your beneficiaries?
You might discover you're leaving too much behind and want to spend more. You worked hard — you should enjoy retirement to its fullest.
We suggest having this analysis done with a financial advisor who has specific expertise in retirement planning and works predominantly with retirees like yourself. They're far more likely to know about real-life scenarios — long-term care events, stress-testing against another 2022-style year, mortgage payoff decisions — that online calculators can't capture.