When you change jobs, you’ll need to decide what to do with your old 401(k). A common choice is to roll the old 401(k) into an IRA, which can be a great option. But according to a recent Vanguard study, 28% of investors who did a 401(k) rollover into an IRA were in cash one year later. Worse even: the majority didn’t realize their retirement savings weren’t invested and most workers who started in cash, stayed in cash for at least seven years. Retirement accounts are often ignored, especially when spread across multiple institutions. Here’s how to fix it.
Avoid Costly Mistakes With A 401(k) Rollover
Rolling an old 401(k) over to an IRA isn’t an overly complex process. But often, investors are too quick to move onto the next thing, forgetting necessary follow ups and periodic account reviews. Here are a couple pro tips when it comes to managing your retirement investments.
Keep Cash In The Bank, Not Retirement Accounts
How can you invest for the future if you’re not invested at all? One aspect particularly alarming aspect of the study was how long account holders stayed in cash after a rollover. The youngest investors were most likely to remain in cash after seven years. Conversely, the oldest investors returned to the market most quickly. The middle age groups fell into similar patterns.
To illustrate just how costly it can be to keep retirement accounts uninvested over a seven year period, consider this illustration:
As illustrated above, there was only one seven-year period with negative returns (which was in 2008, on the heels of the financial crisis). Making the right choices early can pay off due to the benefits of compounding.
Investing A 401(k) Or IRA
Whether you roll an old 401(k) over to an IRA or go with another option after leaving your job, it’s important the account is invested, periodically rebalanced, and other maintenance items are preformed, like updating beneficiaries.
When asked about the cash holdings in the Vanguard study, some did report they intentionally stuck with cash. But most just didn’t realize they weren’t invested. Other respondents said they were overwhelmed by the investment options or simply never got around to it.
Regardless of whether you lack the time or investment acumen, the result is the same. Thankfully, it’s a solvable problem. Here’s how:
Make time and do it yourself
Checking in on your investment accounts periodically can prevent a lot of problems. Although not right for everyone and every situation, target-date funds can be a good solution to for people who don’t have a lot of investment experience — particularly if the alternative is never investing at all.
A target-date fund is a diversified investment mix based on your age and the year you expect to retire. When you’re younger, the exposure to equity will be much higher, perhaps 90%. As you get closer to the target retirement date, the fund automatically gets more conservative. This means shifting away from stocks and more heavily into bonds.
Work with a financial advisor
Individuals with sizable retirement accounts may want to consider working with a financial advisor if they lack the time or investment experience to properly manage the assets. Time is money, and there’s a cost to delaying good financial decisions or prolonging poor ones. Especially when a 401(k) or IRA is a significant portion of your wealth, a target-date fund may not be the best option.
An advisor can do more than just manage your money too, so consider other areas of your financial situation that are in need of optimization.
Procrastination Is The Thief Of Time…And Money
Don’t be your own worst enemy! If changing jobs, first understand what options you have for the old retirement plan. Generally, your choices are: staying in the old plan, IRA rollover, Roth IRA conversion, or transferring money to a new employer retirement plan. Unless your old 401(k) balance is less than $7,000, the company shouldn’t be able to force you out of the plan, so you have time to decide. Just don’t choose cash by accident.
This article is for informational purposes only and should not be misinterpreted as personalized advice of any kind or a recommendation for any specific investment product, financial or tax strategy. This is a general communication should not be used as the basis for making any type of tax, financial, legal, or investment decision.
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