Connect with us

Finance

Don't make this big mistake with retirement funds when you change jobs

Published

on

Don't make this big mistake with retirement funds when you change jobs

When you switch jobs, the basic advice is to roll over your old employer-sponsored retirement account to an individual retirement account, or IRA. Sounds easy, but beware.

I know because I’ve done this a few times. And have learned to keep it simple.

My method: I divvy my rollover up between a handful of low-fee index funds. I have also carved out a portion for a target-date fund, a “set-it-and-forget-it” way to invest based on the date of retirement. (As you age, the fund shifts the account’s investments from stocks to less volatile choices, such as cash and bonds.)

But guess what?

That’s not what many people do, according to recent research from Vanguard Group. Instead, their money is transferred from a former employer’s 401(k) plan to an IRA, usually at another financial services firm, and the balance goes into a market-type cash account that generally pays a marginal rate of interest.

Advertisement

Nearly a third of those who rolled retirement savings into IRAs at Vanguard in 2015 still had the balance sitting in cash seven years later. Not cool. You lose years of potential gains from being invested in stocks, which compound and boost your wealth for your golden years.

FILE - In this Tuesday, May 20, 2008, file photo, John Bogle, founder of The Vanguard Group, talks during an interview with The Associated Press, in New York. Vanguard announced Wednesday, Jan. 16, 2019, that John C.

John Bogle: the late founder of the Vanguard Group was an index fund evangelist. (AP Photo/Mark Lennihan) (ASSOCIATED PRESS)

We’re not talking about chump change here. For investors under age 55, the estimated long-term benefit of investing in a target-date fund (versus staying in cash) upon rollover is equivalent to, on average, an increase of at least $130,000 in retirement wealth at age 65, according to Vanguard.

“How many people stayed in cash and for how long far exceeded our expectations,” Andy Reed, Vanguard’s head of investor behavior research and co-author of the study, told me.

Most older investors, however — and/or those with balances exceeding $100,000 — moved out of cash within the first few months after the rollover. Compared to men, women, however, were significantly more likely to remain in cash for years after the rollover.

Read more: What is the retirement age for Social Security, 401(k), and IRA withdrawals?

Advertisement

There are several ways to handle retirement savings when leaving jobs. You can keep your 401(k) balance with your old company, roll the money into a new employer’s 401(k) plan, or move it into an IRA.

The downside to keeping retirement money at a former employer, of course, is that you can’t add any more money to it. And you’re stuck investing only in that specific menu of investments. An IRA will typically offer many more choices.

When you roll your 401(k) account into an IRA, the company that administers the plan typically liquidates your holdings, then moves the cash into your IRA. But, it doesn’t automatically invest it for you. “We often see people assume their IRA cash will be auto-invested, similar to a workplace plan such as a 401(k),” Rita Assaf, vice president of retirement products at Fidelity Investments, told Yahoo Finance.

Put it down to confusion, “not necessarily about investing, but with the mechanics of IRAs,” Reed of Vanguard said. “It’s not that people intentionally want to make this money mistake. This is not deliberate and part of a master plan. It’s out of sight, out of mind.”

Advertisement

In another survey of over 500 Vanguard IRA clients who completed a rollover in 2023 but were still in cash in June, about two-thirds had no idea how their IRA money was invested.

The remainder said they never got around to investing it, or they didn’t want to risk putting their savings into stocks, or they simply felt overwhelmed by their IRA choices. Reed said: “You can have too much of a good thing when it comes to choice.”

Given all the job changing across all generations in recent years, this mistake is pretty significant, particularly for younger workers. “If you want to have any chance of retiring and living the life you want in retirement, then you’re going to have to have a large portion of your retirement savings allocated to equities to maximize your chance of success,” Reed said.

Have a question about about retirement? Personal finances? Anything career-related? Click here to send Kerry Hannon a note. 

To improve retirement outcomes, you need to stay invested consistently.

Advertisement

One solution: Make it possible for financial services firms to invest rollovers to IRA accounts automatically into a target-date fund or something akin to how many employers now enroll workers automatically into these diversified accounts when they come on board.

Virtually all 401(k) plan sponsors and the majority of state auto-IRA programs use target-date funds when they automatically enroll workers in a retirement plan. Track record: not bad. Vanguard’s Target Retirement Fund 2050 is up 11.4% to date and 10.1% over the past five years.

Senior couple using laptop while sitting on sofa in living room at homeSenior couple using laptop while sitting on sofa in living room at home

Rolling over an IRA? Your best move is to have a plan, says T. Rowe Price. (Photo: Getty Creative) (PIKSEL via Getty Images)

This way you don’t have to know what an index fund or the other nitty-gritty of investment lingo.

Until the laws are changed, your best move is to have a plan for how you want your savings invested before you initiate a rollover, said Lindsay Theodore, a senior manager in advisory services at T. Rowe Price.

Call the firm where you’re moving your money to and get an idea of what would be an appropriate investment, she added. “Having a good understanding up front as to what that process is going to look like can help you get your money invested right away, so it doesn’t get stuck in a cash limbo.”

Advertisement

Kerry Hannon is a Senior Columnist at Yahoo Finance. She is a career and retirement strategist, and the author of 14 books, including “In Control at 50+: How to Succeed in The New World of Work” and “Never Too Old To Get Rich.” Follow her on X @kerryhannon.

Click here for the latest personal finance news to help you with investing, paying off debt, buying a home, retirement, and more

Read the latest financial and business news from Yahoo Finance

Advertisement
Continue Reading
Advertisement
Click to comment

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Finance

NexPoint Real Estate Finance, Inc. Announces Series A Preferred Stock Dividend

Published

on

NexPoint Real Estate Finance, Inc. Announces Series A Preferred Stock Dividend

DALLAS, Dec. 24, 2024 /PRNewswire/ — NexPoint Real Estate Finance, Inc. (NYSE: NREF) (the “Company”) today announced a dividend for its 8.50% Series A Cumulative Redeemable Preferred Stock (NYSE: NREF PRA) of $0.53125 per share. The dividend will be payable on January 27, 2025, to stockholders of record at the close of business on January 15, 2025.

NexPoint Real Estate Finance (PRNewsfoto/NexPoint Real Estate Finance, Inc.)

About NexPoint Real Estate Finance, Inc.

NexPoint Real Estate Finance, Inc., is a publicly traded REIT, with its common stock and Series A Preferred Stock listed on the New York Stock Exchange under the symbol “NREF” and “NREF PRA,” respectively, primarily focused on originating, structuring and investing in first-lien mortgage loans, mezzanine loans, preferred equity, convertible notes, multifamily properties and common equity investments, as well as multifamily and single-family rental commercial mortgage-backed securities securitizations, promissory notes and mortgage-backed securities. More information about the Company is available at nref.nexpoint.com.

CONTACTS
Investor Relations
Kristen Griffith
IR@nexpoint.com

Media Relations
Prosek Partners for NexPoint
pro-nexpoint@prosek.com

Advertisement
Cision
Cision

View original content to download multimedia:https://www.prnewswire.com/news-releases/nexpoint-real-estate-finance-inc-announces-series-a-preferred-stock-dividend-302339003.html

SOURCE NexPoint Real Estate Finance, Inc.

Continue Reading

Finance

Stock market today: Nasdaq, S&P 500 edge higher ahead of Christmas break

Published

on

Stock market today: Nasdaq, S&P 500 edge higher ahead of Christmas break

US stocks opened higher to kick off the final, shortened trading session before the Christmas holiday. The benchmark S&P 500 (^GSPC) edged up about 0.2%, while the tech-heavy Nasdaq Composite (^IXIC) rose roughly 0.3%. The Dow Jones Industrial Average (^DJI) hugged the flatline.

Wall Street is looking to enter its Christmas break rejuvenated, after tech stocks including AI chip giant Nvidia (NVDA) led the march higher on Monday. Markets close at 1 p.m. ET today and are off tomorrow for Christmas Day.

Sizable gains on Friday and Monday have put the indexes back on the path toward their record highs, from which they took a Fed-fueled nosedive last week.

Wall Street is reassessing the path of interest rates next year as it grapples with the reality that the Fed mostly pulled off a so-called soft landing — but couldn’t fully shake the US economy’s inflation problem. According to the CME FedWatch tool, most bets are on two coming holds at the Fed’s January and March meetings, followed by a toss-up in May.

Meanwhile, many eyes continue to be trained on Nvidia, which saw a more than 3.5% gain on Monday. As Yahoo Finance’s Dan Howley writes, 2024 was Nvidia’s year, with the stock up some 180%. But 2025 could contain plenty of challenges.

Advertisement

LIVE 2 updates

  • Stocks open higher to kick off shortened trading day

    In the final sprint to the Christmas holiday, markets added to gains.

    The tech-heavy Nasdaq Composite (^IXIC) led the way higher, rising roughly 0.3%. The benchmark S&P 500 (^GSPC) edged up about 0.2%, while the Dow Jones Industrial Average (^DJI) hugged the flatline.

    Markets close at 1 p.m. ET today and are off tomorrow for Christmas Day

    Advertisement
  • Jenny McCall

    Good morning. Here’s what’s happening today.

Continue Reading

Finance

China’s Finance Ministry Vows Greater, Faster Spending in 2025

Published

on

China’s Finance Ministry Vows Greater, Faster Spending in 2025

China’s finance ministry reaffirmed it will increase public spending with a greater focus on boosting consumption to support the economy next year, ahead of growth headwinds from looming US tariffs.

China will “expand the magnitude of fiscal spending and accelerate the spending pace,” according to a statementBloomberg Terminal published Tuesday following a two-day national conference held by the Ministry of Finance on fiscal work in 2025.

Continue Reading

Trending