If you’ve recently left your job and rolled over your 401(k) savings into an individual retirement account (IRA), you might be losing out on significant investment gains by keeping the funds in cash.
A recent study by Vanguard reveals that in 2015, 28% of workers who transferred their 401(k)s into IRAs left their savings in cash for over seven years. Vanguard’s data indicates that younger investors, women, and those with smaller account balances are particularly prone to this practice.
Experts Advise: Roll Over and Invest
When you transition from a job, you typically have several choices for your 401(k) savings: leaving the money in your former employer’s plan, transferring it to a new employer’s 401(k), cashing it out (with potential tax and penalty implications), or rolling it over into an IRA. Financial experts generally advocate for rolling over into an IRA.
Priya Malani, founder of financial advisory firm Stash Wealth, notes that IRAs often provide a wider range of investment options and lower expense ratios compared to 401(k) plans. Additionally, consolidating your retirement accounts into an IRA can simplify management, as highlighted by Preston Cherry, founder of Concurrent Financial Planning.
However, experts stress the importance of not just rolling over your funds but also actively investing them. Vanguard’s analysis suggests that for investors under 55, allocating the rollover funds into a target-date fund could result in an increase of at least $130,000 by age 65. Target-date funds automatically adjust their asset allocation to become more conservative as investors approach retirement.
“Do not leave your money in cash, unless you are very close to retirement,” warns Malani. “Avoid overly conservative investments to prevent sacrificing growth potential and missing out on the benefits of compounding.”
