There’s a growing trend among new retirees. With increasing frequency, Americans are choosing to leave their retirement savings. According to data from Fidelity, 55% of workers leave their retirement savings in their former employer’s 401(k) plan for a full year after retirement. That’s up from 45% just four years ago.1
Why are retirees leaving their assets in their old 401(k) rather than rolling those funds to an IRA? There could be a variety of reasons. Workers may be happy with the plan’s investment options and administration. They may feel comfortable with the plan’s online access and other management tools. They might not need the money immediately, so they don’t have urgency to do anything with it. It’s also possible that some retirees may not be aware that they can roll their funds into an IRA tax-free.
While there are certainly benefits to keeping your assets in your employer’s 401(k), there are also good reasons to roll the assets into an IRA. If you’re approaching retirement, now is the time to consider your options for your 401(k), which may be your largest retirement asset. Below are a few factors to consider:
If you’ve been in your 401(k) plan for a significant amount of time, you are likely familiar with the plan’s investment options. You may feel comfortable with your allocation and perhaps you even like the plan’s fee structure and performance.
However, your goals and risk tolerance won’t always be the same as they are today. Just as your investment strategy has evolved through your career, it will likely continue to evolve through retirement. What you’re comfortable with today may not be something you’re comfortable with in the future.
Generally, IRAs offer significantly more investment options than most 401(k) plans. That’s not necessarily true with every IRA and 401(k), but it is often the case. While a 401(k) plan may offer dozens of options from select providers, an IRA will often allow you to choose from a wide universe of stocks, bonds, mutual funds, ETFs, Alternatives, options, annuities, and more. That greater diversity of options can help you develop an allocation that is just right for your goals and risk tolerance, no matter how it changes in the future.
Management and Administration
You also may be comfortable with your 401(k) plan’s management and administration tools. Perhaps the website is easy to use. Maybe you have a dedicated support person within the plan administrator’s office. You know how to make changes and review your account, and you may not want to make changes at this time.
Again, though, consider whether it will still be convenient in the future to keep your assets in your old 401(k). If you’re like many retirees, you may have multiple 401(k) plans from old employers. You also might have IRAs and other investment accounts. It’s difficult to manage and adjust your strategy when you have accounts spread across multiple custodians and institutions. You may also have the unintended consequence of overlapping investments that may affect your risk mitigation without realizing it.
Also, when you reach 72, you’ll have to take required minimum distributions (RMDs) from your 401(k) and IRA. Again, that process may be inconvenient if you have to pull distributions from multiple accounts.
Many of these issues may be resolved by consolidating your qualified retirement assets into one IRA. Once you consolidate your qualified assets into one IRA, you simply have to manage the investment option of one account. It will also make managing your RMD calculations and withdrawals a much easier process and may potentially eliminate missed RMDs mistakes.
While you may not need to tap into your 401(k) assets today, it’s possible that at some point in the future you will need to take withdrawals from your retirement savings. Of course, it’s difficult to know how much you can safely take in a withdrawal each year. What if you live longer than you anticipate? What if the market takes a downward turn? How can you be sure your assets and income will last for life?
If you are concerned about the possibility of running out of money during your lifetime, you can use financial vehicles like annuities to convert a portion of your savings into guaranteed* income. These vehicles are available in most IRAs and provide you with a regular consistent check that is guaranteed* for life, no matter how long you live or how the markets perform.
Historically, annuities with guaranteed income benefits have been more available in IRAs than in 401(k) plans. However, the passage of a new law, called the SECURE Act, creates the possibility for 401(k) plans to start offering these vehicles. Whether it’s through your IRA or 401(k), guaranteed income could give you a base level of financial stability confidence in retirement.
Ready to implement a plan for your 401(k) assets? Let’s talk about it. Contact us today at Emerald Blue Advisors. We can help you analyze your needs and develop a strategy. Let’s connect soon and start the conversation.
Investment advisory services are offered through Emerald Blue Advisors, Inc., a registered investment adviser offering advisory services in the State of California and other jurisdictions where registered or exempted. This communication is not to be directly or indirectly interpreted as a solicitation of investment advisory services to residents of another jurisdiction unless otherwise permitted. Nothing in this document is intended as legal, accounting, or tax advice, and is for informational purposes only.
*Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values.
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19563 - 2019/12/16
Rola Hajeb was inspired to join the financial industry back in 1997. Trustworthy and empathetic, she is focused and committed to helping her clients.