The Big 401(k) Rollover Mistake
Crazy article in the Wall Street Journal yesterday on people who roll-over a 401(k) into an IRA then leave the money in cash for years earning nearly nothing.
A key stat from the article:
Considering that US large-cap stocks have an annualized gain of 7.19% (after inflation) as compared to 0.31% for cash, that's a massive miss for anyone holding cash in their accounts.
Let's look at what these people could have done to start to build an income stream for retirement.
I like IRAs as compared to 401(k)'s
401(k)'s have limited investing options that are relatively expensive as compared to an IRA, where you can basically invest in anything you want.
It's that simple. Want to invest in a simple index fund, you can find a cheap one. With your 401(k) you're limited to the investment options that your company has worked out with the 401(k) provider.
I prefer individual stocks (that increase dividends yearly), and I've not yet found a 401(k) that allows me to put my money there.
Putting your money in an IRA gives you cheaper investing options and gives you more options on things to invest in.
IRA's are a great way to use a dividend reinvesting strategy, like I outline in my book, because you don't have to worry about taxes on dividends. So if you're finding yourself in a position where you've got an IRA full of cash, why not check it out and get yourself started earning money without working?
How to get started
Once you're in an IRA, you can start to buy any stock you like. My favorite starting point is the list of dividend aristocrats, companies that have raised their dividends for 25 consecutive years or more. By raising their dividends one hopes the dividend payout keeps up with inflation.
After picking a company or three to invest in, make sure you go into your brokerage settings and turn on dividend reinvesting. This takes your dividends and uses that money to accumulate more stock (further increasing each future dividend payout).
And that's it. Set it and forget it and just watch your quarterly dividend payouts increase each quarter (mostly from reinvestments, but once a year from dividend increases also).
I've put all of this, and more, into a quick little e-book I wrote for people switching jobs in order to help them understand how to maximize their retirement with a 401(k) rollover.
Any questions about anything I've said, just leave a comment below.
Post-posting followup
Found another article covering the same news in much more detail than the WSJ one above. It's worth giving it a read to understand how big company lobbying affects the discourse and behavior on topics like investing: