Moving is already enough of a financial stress and pain that you cannot afford to compound the pain by leaving your retirement behind. You’ve had to pay for a rental truck (or movers), stage and sell your house, find a new place to live, and put down deposits on new utilities.
It can feel like money is just flying out of your bank accounts left and right. No matter how much you prepare or have a checklist there will always be surprises that suck an extra $20, $50, or $100 out of you.
With all the tasks distracting from your focus you cannot forget a simple, but massive task: taking your retirement with you from your old job.
Don’t Leave Retirement Behind
Your retirement account at work (usually a 401k or 403b account) isn’t something that is sitting on your desk. On your last day at work your 401k doesn’t get pulled off your cubicle wall with the photos of your kids and put into a box.
It’s this distant place where money have come out of your paycheck, often without much thought, and placed into investments in some financial institution based in another state. There are no sirens or warnings going off as the security guard walks you out to your car.
That makes it extraordinarily easy to forget your retirement account behind.
Why Leaving a 401k or 403b Behind is a Bad Idea
There are multiple issues at play:
No portfolio changes
As you get older your portfolio won’t automatically become more conservative. If you are 30 years old and investing those funds are probably sitting in growth stock mutual funds. That’s fine at age 30 when you have years to recover from the ups and downs of the stock market.
But at age 55? Those funds need to be in more conservative investments like bond mutual funds.
Higher investment costs
A 401k provided through your employer has an unknown cost structure. You probably know what the expense ratios are with the mutual fund offerings, but that doesn’t tell the true story. There are behind the scenes administration fees that may get pulled out of your account on an annual basis to help pay for the plan.
The problem here is the lack of transparency. If you don’t know the cost structure how can you make an informed decision on where best to put your money for the long haul?
When you select a Traditional IRA to roll your investments in to from your previous job you know what the cost structure looks like. You know whether or not there is a transaction fee. You know all of the expense ratios and potential administration fees. You have more knowledge, and can use that knowledge to compare multiple IRA providers to choose the best one for you.
You can forget about the money
Wouldn’t it be nice to have an extra $100,000 in retirement? Of course it would. But what if the funds that grew over time to $100,000 were left behind at your first job? What if you completely forgot about those funds, and never recovered them?
There is a huge risk that once you leave a job you can completely forget about any retirement savings you had there, big or small. Yes, the provider should be mailing you annual statements… but what if you changed addresses or elected for online reports that were mailed to your old work email address?
There’s too much at risk to not take the account with you, and to do it quickly after you settle in to your new area.
In our next article we will look at what steps you need to take to roll over your 401k (or 403b) to a new investment account. We’ll look at a couple of accounts to consider for your roll over, and I’ll tell you why you should never close or cash out your 401k from a previous employer.
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I update our financial spreadsheet at the end of each month, so I am very unlikely to forget about the $60K I have sitting in my previous employer’s 401K plan. I shopped around and found that the fees were reasonable so I’ve decided to leave it there. Anyone who doesn’t keep up with their accounts (ALL of their accounts) is not interested in accumulating wealth anyway IMHO.
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