Personal Finance
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 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.
How much should you save for retirement?
“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.
Why 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 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.”
Lordhenrivoton | E+ | Getty Images
Nobody really talks about the math. It’s 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. 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.
The risks of required withdrawals
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.
‘There’s a paradox: Did I save too much?’
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.
The Federal Reserve held interest rates steady at the conclusion of its policy meeting on Wednesday.
In what could be Jerome Powell’s last as chair before President Donald Trump’s yet-to-be-confirmed nominee Kevin Warsh takes the helm, central bankers maintained the federal funds rate in a target range of 3.5% to 3.75%.
Inflation has surged since the war with Iran began, leaving policymakers with limited room to act, according to Sean Snaith, the director of the University of Central Florida’s Institute for Economic Forecasting. “We’re in a kind of suspended animation — between Iran and the Fed transition,” Snaith said.
Before the oil shock, inflation was holding above the Fed’s 2% target but not worsening. Now the jump in energy costs could have longer-term inflationary effects, economists say.
For Americans struggling in the face of higher gas prices and overall affordability challenges, the central bank’s decision to keep interest rates unchanged does little to ease budgetary pressures. “The cavalry isn’t coming anytime soon,” Snaith said.
How the Fed decision impacts you
The Fed’s benchmark sets what banks charge each other for overnight lending, but also has a trickle-down effect on many consumer borrowing and savings rates.
Short-term rates are more closely pegged to the prime rate, which is typically 3 percentage points above the federal funds rate. Longer-term rates, such as home loans, are more influenced by inflation and other economic factors.
Credit cards
Most credit cards have a short-term rate, so they track the Fed’s benchmark.
After the Fed cut rates three times in the second half of 2025, the average annual percentage rate has stayed just under 20%, according to Bankrate.
“Without Fed rate cuts, there’s not much reason to expect meaningful declines anytime soon, so carrying a balance will remain very expensive,” said Matt Schulz, chief credit analyst at LendingTree.
Mortgage rates
Fixed mortgage rates, on the other hand, don’t directly track the Fed but typically follow the lead of long-term Treasury rates.
Concerns about how the Iran war will impact the U.S. economy have already pushed the average rate for a 30-year, fixed-rate mortgage up to 6.38% as of Tuesday, from 5.99% at the end of February, according to Mortgage News Daily.
That leaves homeowners with existing low mortgage rates “feeling stuck,” said Michele Raneri, vice president and head of U.S. research and consulting at TransUnion. “Mortgages, more than any other credit type, work on a churn,” she said, referring to how a dip in rates can boost borrowing activity.
Student loans
Federal student loan rates are also fixed and based in part on the 10-year Treasury note, so most borrowers are somewhat shielded from Fed moves and recent economic uncertainty.
Current interest rates on undergraduate federal student loans made through June 30 are 6.39%, according to the U.S. Department of Education. Interest rates for the upcoming school year will be based in part on the May auction of the 10-year note.
Car loans
Auto loan rates are tied to several factors, including the Fed’s benchmark. Because financing costs remain elevated, new car buyers are taking on longer loans to keep their monthly payments manageable, according to the latest data from Edmunds.
Even so, with the rate on a five-year new car loan near 7%, the average monthly payment on a new car rose to $773 in the first quarter of 2026, an all-time high.
“Car buyers are in a tough spot right now because they’re getting squeezed from both ends: high sticker prices and high interest rates, with neither showing any signs of letting up,” said Joseph Yoon, consumer insights analyst at Edmunds.
“Until the rate picture shifts, buyers will keep stretching loan terms to make payments work, which only adds to the total cost of ownership down the road,” Yoon said.
Savings rates
While the Fed has no direct influence on deposit rates, the yields tend to be correlated with changes in the target federal funds rate. So, although rates on certificates of deposit and high-yield savings accounts have fallen from recent highs, they are holding above the annual rate of inflation.
For now, top-yielding online savings accounts and one-year CD rates pay around 4%, according to Bankrate.
“Yields on high-yield savings accounts and certificates of deposit are down from their peaks of a few years ago, but they’re still strong compared to what we’ve seen for most of the past decade,” Schulz said.
Milan Markovic | E+ | Getty Images
The average tax refund is 11.2% higher this season, compared with about the same period in 2025, according to the latest IRS filing data.
As of April 10, the average refund amount for individual filers was $3,397, up from $3,055 about one year ago, the IRS reported on Friday.
The IRS data reflects about 114 million individual returns received, out of about 164 million expected through Tax Day. Next week’s filing update is expected to include data through the April 15 deadline.
President Donald Trump‘s 2025 legislation, rebranded to the “working families tax cuts,” was a key talking point for Republicans on Tax Day.
With the November midterm elections approaching and Republicans defending slim majorities in Congress, many GOP lawmakers have highlighted Trump’s tax breaks and higher average refunds.
Meanwhile, affordability has been top of mind for many Americans amid rising costs of gas, electricity, food and other living expenses.
For filers who expected a refund this season, nearly one-quarter, or 23%, planned to use the funds to pay down credit card debt, and the same share said they would save the payment, according to the CNBC and SurveyMonkey Quarterly Money Survey, released in April. It polled 3,494 U.S. adults at the end of March.
Who benefited from Trump’s ‘big beautiful bill’
“It’s been a great tax season for the American people,” many of whom have benefited from Trump’s tax breaks, Treasury Secretary Scott Bessent said during a White House press briefing on Wednesday.
More than 53 million filers claimed at least one of Trump’s “signature new tax cuts” — the deductions for tip income, overtime earnings, seniors and auto loan interest — the Department of the Treasury also announced on Wednesday.
Those filers, who claimed the deductions on Schedule 1-A, have seen an average tax cut of over $800, according to the Treasury. Tax cuts can trigger a higher refund or reduce taxes owed, depending on the filer’s situation.
Some filers who itemize tax breaks have also seen benefits from the bigger federal deduction limit for state and local taxes, known as SALT. Trump’s legislation raised that cap to $40,000, up from $10,000, for 2025.
The latest SALT deduction limit change is expected to primarily benefit higher earners, according to a May 2025 analysis of various proposals from the Tax Foundation.
The Treasury has not released data on how many filers have claimed the SALT deduction during the 2026 filing season.
Traders work at the New York Stock Exchange on April 16, 2026.
NYSE
U.S. stocks climbed to record highs on Thursday against a backdrop of war, an oil supply shock and economic forecasts warning of stunted growth amid a protracted conflict.
Many investors may be thinking: Why?
Largely, it’s because the stock market is a barometer of what investors think will happen in the future, rather than an assessment of the present day, according to economists and market analysts.
Investors are essentially shrugging off the Middle East conflict as a blip that will be resolved relatively quickly, they said.
“The stock market isn’t trying to price what’s happening today,” said Joe Seydl, a senior markets economist at J.P. Morgan Private Bank. “The stock market is always trying to price what the world is going to look like six to 12 months from now.”
Why stocks have been ‘resilient’
The S&P 500, a U.S. stock index, fell about 8% in the initial weeks of the Iran war, from the start of the conflict on Feb. 28 to a recent low on March 30.
But stocks have rebounded since then, erasing all losses since the beginning of the war. The S&P 500 closed at an all-time high on Thursday — about 11% higher than its nadir at the end of March. That followed a record close on Wednesday.
“The market has remained very resilient in the face of the war and has rallied strongly on the prospect that it will be resolved,” said Mark Zandi, chief economist at Moody’s.
A ship waits to pass through the Strait of Hormuz following the two-week temporary ceasefire between the US and Iran, which is conditional on the opening of the strait, in Oman on April 8, 2026.
Shady Alassar | Anadolu | Getty Images
And while investors cheered the possibility of a diplomatic off-ramp to the conflict, the temporary ceasefire has appeared tenuous, with the U.S. and Iran each accusing the other of breaking the agreement.
Nations haven’t been able to reach a peace deal ahead of the ceasefire’s end. Vice President JD Vance said U.S. officials left peace talks in Pakistan over the weekend after the Iranian delegation refused to agree to American demands not to develop a nuclear weapon.
The markets ‘have memory’
Ultimately, the stock market is signaling a collective belief that tensions will ratchet down, the war will end in the near term and oil flows through the Strait of Hormuz will normalize, economists said.
That’s largely because investors have been conditioned to believe that President Donald Trump will back off if the economic pain becomes too intense, economists said — the so-called “TACO” trade, shorthand for “Trump always chickens out.”
“Investors strongly believe — and have been conditioned to believe — he’s going to stand down, find a way to pivot, declare victory and move on,” Zandi said.
Trump has pushed back on the notion of backing down, framing his brinkmanship as a savvy negotiating tactic.
Economists pointed to a recent example of this dynamic: in April 2025 during so-called liberation day, when the Trump administration levied a host of tariffs on U.S. trading partners.
Within days — after the stock market had cratered more than 12% — Trump announced a 90-day pause on those tariffs. Stocks then saw one of their biggest daily rallies in history following Trump’s reversal.
Investors remember that Trump often de-escalates geopolitical shocks — which is why they’ve seized on positive headlines that hint at progress in peace talks, for example, Seydl said.
“The markets have memory,” Seydl said.
AI stocks and the ‘tech boom’
Traders celebrating at the New York Stock Exchange on April 15, 2026, as the S&P 500 closed above the 7,000 level for the first time.
NYSE
There are other factors underpinning market resilience during wartime, economists said.
One is the investors’ enthusiasm for artificial intelligence and technology stocks, which account for almost half of the S&P 500’s market capitalization, Zandi said.
“Those stocks run on their own dynamic independent of anything, including the war in Iran,” Zandi said. “I think we would have been down a lot more and it would have been harder for us to recover had it not been for the very, very optimistic perspectives on AI.”
We’re in the middle of a “tech boom” — and investors are likely to remain optimistic until they think the tech cycle has run its course, Seydl said.
More broadly, stock investors are essentially making a bet on the future earnings growth of a company — and the earnings backdrop has been “pretty solid,” Seydl said.
Consumer spending appears to be stable, for example, economists said. And companies are getting a boost to their after-tax earnings from the GOP’s so-called “big beautiful bill,” which, among other things, made it easier to write off investments upfront and therefore reduce their tax liability, Zandi said.
Going forward
Experts said there will be an economic hit from the Iran war, though.
“Despite the recent news of a temporary ceasefire, some damage is already done, and the downside risks remain elevated,” Pierre-Olivier Gourinchas, director of research at the International Monetary Fund, wrote Tuesday.
A protracted conflict risks deep and global economic pain, he wrote.
Even if the conflict is short-lived — as the broad market expects — stocks are unlikely to march much higher until it’s clear the U.S. is on the other side of the war and its economic fallout, Zandi said.
If investors are incorrect, and President Trump doesn’t back down or quickly extricate the U.S. from the war, the stock market may see a “full-blown correction” or worse, Zandi said. A stock market correction is a decline of at least 10% from recent highs.
“Everyone thinks they know what the script is,” Zandi said. “Now they just need to follow the script. If they don’t, the market will have some real problems.”
The uncertainty provides yet another example of why the average investor with a long time horizon should stick to their investment plan and ignore the noise, experts said.
“Trying to time the market is very difficult if not impossible for the average investor,” Seydl said. “It’s better to take a long-term perspective and ride out bouts of volatility.”
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