Rolling over your 401(k) is like sending your grandma flowers: we all think we should probably do it, but most never get around to it. It takes a couple of hours and might be the most valuable time you spend in your life (This is true for the grandma flowers too). Here are the reasons why. #4 saves you almost a million bucks, so don’t skip out early!
In 2016 the average employee tenure was 4.2 years. In a 40 year career that would be more than nine different jobs. If each of those jobs offered a 401(k) you could have nine accounts floating out there. Do you know where each and every one is? Have all the login information? Know how much is in there? Are they invested in the right stuff? Losing track of one of them could cost you tens or hundreds of thousands of dollars. Rolling over to a central, personal IRA keeps everything where you know it is.
2. Cut Ties With Former Employers
401(k)s are employer sponsored retirement accounts. Once you leave a job, that employer generally doesn’t give a shit about you. But when you want to go back and get your money out, you might need to work with them again. Lost your account info? Talk to your old boss or HR department. Can’t remember what bank it’s with? Hope your old company is still taking your calls. Your old company has since been acquired or gone out of business? Now what? Rolling over to your own personal IRA cuts your old company completely out of your life!
3. Unlimited Investment Options
When you sign up for a 401(k) you are given a list of investment options. Those options are decided by your employer. Often they suck. It’s still very worth it to invest for the tax benefits, but once you leave do a rollover to your own personal IRA and invest in whatever you want! (Hint: Buy and hold index funds)
4. It will cost you $732,102 if you don’t
Stay with me here because we’re gonna do some math.
- Fidelity recently reported that the average millennial’s (21-37 years old) 401(k) balance is $25,500.
- The average 401(k) charges 1% annually in fees. (It’s even worse if your 401(k) was with a small business which generally have higher fees)
- A personal Rollover IRA can have fees as low as 0%. (If you invest in Fidelity’s 0% index funds, or very close to 0% with most brokerages’ index funds)
- An S&P 500 index fund has gained 9.8% per year on average over the last 90 years.
So that $25.5K you have in your old IRA is likely getting dinged for 1% per year. That means instead of your money growing at 9.8% it’s growing at 8.8%. That doesn’t sound terrible, but remember the power of compound growth! If you left that job at 26 and withdraw that money at 65, that’s 39 years of growth at the lower growth rate. At 9.8% that $25.5K would grow to $977K at 65 vs $684K earning 8.8%. That means not rolling over your FIRST old IRA cost you $293K. Ouch. But that’s just one. Your other eight will have successively less time to grow since you’ll be closer to retirement, but add them up and you’re kissing $723,102 away if you pay the 1% fees. Here’s a Google Sheet that I used to do the math. That’s a lot of numbers, so here’s a chart of 8.8% growth vs 9.8% growth:
That’s still kind of a lot of numbers so here’s a picture of what that $723K could have bought you:
It’s brand new, 43 feet long, cruising speed of 35 knots and you just pissed it away by not rolling over your 401(k). (It’s actually listed on yachtworld.com for $691,985 so you’ll have $31,117 left over to throw a massive party for your friends who don’t have yachts because they didn’t roll over their 401(k)s).
So please, for the love of god, rollover your 401(k) and stop being a dick and send Grandma some flowers.