
Your Survival Guy has seen his share of 401(k)s sitting around doing nothing, left behind like misfit toys. One of the biggest reasons is that investors forget they have them. Don’t let that be you. Consolidate with my favored Fidelity Investments and get your accounts rowing in synch. Schlomo Benartzi explains the outdated 401(k) system in The Wall Street Journal, writing:
One major challenge is that millions of Americans end up with multiple small retirement accounts that they have left with former employers. This shouldn’t matter in theory: After all, 10 accounts of $10,000 should be treated the same as one account of $100,000.
But in practice, that isn’t how people react. As Nobel laureate Richard Thaler has written, smaller windfalls—like those left-behind 401(k) accounts—often are treated as income, and are thus far more likely to be spent. Large windfalls, in contrast, are more likely to be seen as assets that need to be saved for the future.
This psychology has a big impact on retirement savings. According to research by Vanguard, about 40% of workers with 401(k) balances between $1,000 and $10,000 cash out their accounts upon leaving an employer. In contrast, less than 10% of accounts with balances over $100,000 are cashed out. These larger accounts were seen as assets worth preserving.
These withdrawals add up, and lead to lost savings of between $60 billion and $105 billion a year, according to the Employee Benefit Research Institute. One study found that for every $1 that goes into retirement accounts, about 40 cents go out as early withdrawals. Those early withdrawals also generate significant tax penalties for workers.
Action Line: Every time someone cashes out a smaller 401(k) instead of rolling it over into an IRA, they’re stripping the benefits of compounding from their savings and starting back at zero. When you want to talk about compounding and putting it to work in your retirement portfolio, email me at ejsmith@yoursurvivalguy.com. In the meantime, click here to subscribe to my free monthly Survive & Thrive letter.
Read more about 401(k) rollovers here: