401(k) balance growth comes with retirement planning pitfalls: advisors

Gregory Hutchison, 72, is living most people’s retirement dream. After a nearly 44-year career as an expert in information technology at IBM, Hutchison retired in 2021 with close to $1 million in his 401(k).

He and his wife sold their home and downsized to a smaller house by the water in Snow Hill, Maryland, where he likes to go boating.

“I don’t live a lavish life, but I have enough to go out to dinner every night, if I want to, with my wife,” he said.

Even so, Hutchison said he wishes he had consulted with a financial advisor sooner. “There is so much you don’t know — the taxes, expenses are coming from places you didn’t know existed,” he said.

“I got lucky,” he said of his savings. “The stock market was growing.”

Thanks in part to market gains, workers have more in their 401(k)s than ever before.

Helped also by features like auto enrollment and auto escalation, average retirement account balances increased more than 10% in 2025, according to recent reports by Fidelity Investments and Vanguard.

While amassing an adequate nest egg is undoubtedly a good problem to have, it can come with challenges, financial advisors say — especially for households that save without much thought to diversifying retirement assets across different types of financial accounts.

“Nobody really talks about the math. It’s save, save, save,” said Certified Financial Planner Robert Jeter, an advisor at Back Bay Financial Planning & Investments in Bethany Beach, Delaware.

There are a few simple rules of thumb for retirement planning, such as saving 10 times your earnings by retirement age and the so-called 4% rule for retirement income, which suggests that retirees should be able to safely withdraw 4% of their investments, after adjusting for inflation, each year in retirement.

Still, those are only rough guidelines. It can be difficult to zero in on a specific “magic number” to retire comfortably — which can lead some households to “radically” underspend when they’re younger in order to sock away as much retirement savings as possible, said David Blanchett, a CFP and head of retirement research for Prudential Financial.

Unlike other savings goals, such as for a four-year college degree, the length of one’s retirement is ultimately impossible to know, Blanchett said.

While it’s different for everyone, most savers are surprised at how far their resources will go relative to their working years once payroll taxes and 401(k) contributions are no longer deducted, Jeter said. For example, someone making $100,000 a year may only need $75,000 each year in retirement, he said, some of which may come from Social Security.

For some, having so much money in retirement accounts can be a double-edged sword if they have few other assets to tap in an emergency.

Recent reports show more cash-strapped savers have raided their nest eggs. In fact, 401(k) hardship withdrawals hit a record high last year, according to Vanguard, which tracks 5 million accounts.

Most financial experts advise against withdrawing money from an employer-sponsored retirement plan, since it often comes at a cost — notably, a steep 10% penalty, along with state and federal income taxes.

Under extreme circumstances, savers can take a hardship distribution without incurring an early withdrawal fee if the money is being used to cover a qualified expense, such as a medical bill, loss due to natural disasters or to buy a primary residence or prevent eviction or foreclosure.

Even then, financial advisors recommend against raiding 401(k)s or individual retirement accounts early, if possible, since it essentially means shortchanging your retirement.

Joon Um, a CFP at Secure Tax & Accounting in Hayward, California, said many of his clients are high earners who did a “great job maxing out their 401(k)s and IRAs, but ended up a bit ‘retirement rich but cash poor.'”

When Los Angeles wildfires destroyed parts of the Pacific Palisades and other neighborhoods last year, some had to dip into retirement savings, he said.

“It’s not always easy to use that money right away” because of taxes and penalties, Um said. “It’s a reminder that while retirement accounts are great for long-term savings, it’s also important to have some flexible savings outside of them for unexpected events or if someone wants to retire earlier than planned.”

There are also ways for early retirees to access certain retirement savings early without incurring a tax penalty. However, they can be a bit nuanced, 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 due to the “rule of 55,” Lawrence Pon, a CFP and certified public accountant based in Redwood City, California, wrote in an email.

IRA owners can take advantage of substantially equal periodic payments — also known as 72(t) distributions, Pon said.

“This takes careful planning, and there are a lot of rules to follow,” he said.

Since the bulk of retirement savings is held in pretax accounts, being “retirement rich” can also come at a cost down the road.

That’s due to the required minimum distributions, or RMDs, that retirement savers must take from their pretax accounts when they hit a certain age — regardless of whether they need the money.

“We run into clients all the time that did a fantastic job saving, but all of their savings are pretax, and they have income forced upon them,” Patrick Fontana, a CFP based in Dallas, wrote in an email.

Often, that income is much more than they need to live on, forcing households into higher income tax brackets and so-called IRMAA payments, Fontana said. These “income-related monthly adjustment amounts” can cause Medicare premiums to rise.

The problem can be “even further compounded” for married couples if one spouse passes away, since the required distributions typically stay roughly the same but the surviving spouse is subject to single tax rates, “which are much worse,” Fontana said.

Having savings spread across different types of financial accounts with different tax treatment — like Roth 401(k)s and IRAs, and taxable brokerage accounts in addition to pretax retirement savings — can reduce such challenges. It can give people more options to draw income, and help reduce their overall tax burden.

Savers who earn too much to make direct Roth IRA contributions can still take advantage of a Roth 401(k) if their company offers one. They can also weigh so-called Roth conversions. This entails changing pretax funds to Roth money, which comes with an upfront tax bill but has the benefit of tax-free withdrawals in retirement.

While having over-saved may be more beneficial than not, some clients express regret about whether they should have traveled more extensively or helped their children buy a home, for instance, Jeter said.

“A lot of them saved diligently, but there’s a paradox: Did I save too much?” Jeter said.

Many workers aim to do just that. The FIRE movement — which stands for Financial Independence, Retire Early — is built on the idea that handling your money super efficiently can help you reach financial freedom earlier.

“People in FIRE talk about saving 80% of their income. But what’s the fun in that?” said Blanchett, of Prudential Financial. “I don’t know I’d call it a risk, but it’s pretty close.

“I think it’s important to have a balance,” he said.