3 Things to Do With Your 401(k) Before You Retire in 2030

If you're planning to retire in 2030, you may already be picturing a time when you don't have to report to work every day. But the glorious retirement you've earned is going to cost money. And while Social Security might help pick up some of the slack, it's important to make sure your 401(k) is set up to serve your needs.

Here are a few key moves to make with your 401(k) if you're planning to retire in under five years.

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1. Reassess your investment risk

At some point, you were probably told to invest your 401(k) aggressively for retirement to grow your money. And whoever told you that gave you good advice in your 20s, 30s, 40s, and maybe even 50s, depending on your retirement timeline.

But now that you're getting a lot closer to that milestone, it's important to reassess your portfolio. Going heavy on stocks makes sense when retirement is far off. But as it gets closer, it's important to shift, at least partially, into less volatile investments.

To be clear, you don't want your 401(k) to be devoid of stocks in retirement. But a more balanced mix of stocks and bonds could give you the best of both worlds -- ongoing growth and steady income without undue risk.

Now if you have your 401(k) invested in a target date fund, you may not need to make any portfolio moves in the coming years. That's because these funds are specifically designed to adjust your risk profile as retirement nears. But if you're loaded up on stock-focused index funds you chose yourself, it's probably time to rebalance.

2. Estimate how much income your 401(k) can actually produce

If you've been funding your 401(k) steadily for many years, you may be sitting on a nice balance as retirement gets closer. But while the number might look impressive on screen, it's important to break it down into annual income so you get a sense of what lifestyle you can afford.

To do that, you'll need to land on a withdrawal rate. You could use the popular 4% rule or pick another rate you feel more comfortable with.

From there, it's simple math. If you have a $2 million 401(k) and decide you're happy withdrawing 4%, you're looking at $80,000 a year, not including other income streams you might have. That should give you a good starting point to work with.

3. Make a plan for taxes before withdrawals begin

If you have your money in a traditional 401(k), you unfortunately don't get to keep it all. Traditional 401(k) withdrawals are subject to taxes in retirement. And those taxes could have consequences beyond just owing the IRS more money each year.

High-income retirees risk having to pay taxes on their Social Security benefits. And if you have a very large amount of taxable income in retirement, you could be assessed surcharges on your Medicare premiums.

That's why it's important to make a plan for dealing with taxes on your 401(k) withdrawals. That could be a combination of careful budgeting and coordinating withdrawals across different accounts. It could also mean looking into a Roth conversion ahead of or early on in retirement, before required minimum distributions begin.

The years leading up to retirement are a pivotal point in your savings journey. Now that you're right on the cusp of that next stage, it's time to make sure you have a good handle on how to manage your 401(k). That could mean making some changes to your current investment mix, figuring out an income and withdrawal plan, and arming yourself with different strategies to reduce your taxes later in life.

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