Cash out that 401k and let’s buy a boat!

Cash out that 401(k) and let’s buy a boat!

After helping people with their retirement nest egg for over 30 years I have seen many people change jobs and make quick decisions on their old 401(k)’s.
But, life usually happens and those old 401 (k)’s get left behind and the statements begin collecting dust in the junk drawer. (Oh admit it, as everyone has at least one junk drawer!)

Usually, when someone is younger they think they have a lot of time, so they will simply cash out their old 401 (k). But quick back of the napkin calculation can show how expensive that can be for your retirement.
John, who is 25 years old switches jobs and has $9,350 in his old 401(k). John figures he has years until retirement and decides to take his money and buy a boat.
If he would have simply transferred the 401(k) to his new employer, he would have had and extra $139,262 in his account, assuming a 7% return.
And it gets even worse. If we convert the extra funds into an income and assume a 4% annual withdrawal rate, his boat purchase has cost him $464 of lost income at age 65.
So, bottom line, please don’t cash in your old 401(k). Bite the bullet and leave your retirement funds alone!

It’s too hard to transfer, let’s leave that old 401(k) alone

One of the hardest things to do is go through all the paperwork to transfer your old 401(k) when you change jobs.
As with any task, set a date and just do it!
If you’re going to transfer to your new company’s 401 (k), the HR department will more than likely help you with most of the paperwork. If you’re going to rollover to an IRA, your mutual fund company or advisor should also be able to help you with the paperwork.
So, there is really no excuse to leave your old 401(k) in limbo. Take charge of your retirement and determine where you plan on moving your funds and get it started.

IRA vs new company 401 (k), which one?

If you’re trying to decide which way to go with your old 401(k), here are 3 quick tips on which one is for you:
First, look at your new 401(k) and see what investment options are available and see if you have enough options to diversify your account.
Ideally, you would like to see investment choices that cover most of the major asset classes. Here is my must have list:
Large US stock
Midcap US stock
Small Cap US stock
Developed Markets Non-US stock
Emerging Markets Non-US stock
Real Estate
Natural Resources
US Bonds
Inflation Protection Bonds
Non-US Bonds
Regardless of your age, you will need diversification and the more choices across asset classes the more change of getting that diversification.
Second, if your 401(k) has enough investment choices to satisfy your level of diversification, then the next biggest hurdle for you is keeping your cost low.
Today 401(k)’s have become expensive closet indexes.
What I mean by that is most of the 401(k)’s I analyze have investment choices in them that don’t beat their benchmarks. So, you’re paying hefty fees to underperform and a good alternative is to simply buy a fund that matches an index and pay the lowest cost you can.
Third, if you decide that your best option is to rollover your account to an IRA, then again want to make sure that whoever you use is looking out for your best interest.
My suggestion is to use the “Find an Advisor” search tool from NAPFA by clicking here: Find an Advisor
The National Association of Personal Financial Advisors (NAPFA) and is the country’s leading professional association of Fee-Only financial advisors – highly trained professionals who are committed to working in the best interest of those they serve.
These are then only advisors that I know of who will sign a Fiduciary Oath to their clients.
The biggest advantage of rolling over your 401k to an IRA is your investment choices will usually go up considerably allowing maximum investment choices and maximum diversification.
The drawback is that you will now have to take charge of your investment more than ever. So, you will have more decisions than before, but that can actually be a good thing and if you pick the right advisor, you will be guided each step of the way.
Good luck and if you have any questions, post them below. I personally answer all questions.
Take Care,
Jerry Broussard

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