Building a sizable retirement nest egg is anything but automatic. There are plenty of landmines along the way that could trip you up, from choosing bad investments to contributing less than you should.
But one mistake could literally wipe out tens of even hundreds of thousands from your retirement account value, and unfortunately, it’s extremely common — particularly among those that frequently change jobs.
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Here’s a look at the one simple mistake that could literally derail your retirement, even if you’re a diligent saver.
The One Big IRA Mistake: Not Reinvesting Your Rollover Money
If you leave a job where you’re invested in a 401(k) plan, you’ll generally have to move that money out of the account within a short period of time.
If your new employer doesn’t have a 401(k) plan — or if you simply retire — you’ll have to roll that money over into an IRA. While that’s a tax-free transaction, the problem for many investors is that the money is transferred as cash. While that might not seem like a problem, here’s why it is.
Typically, if you have a 401(k), all of your money is invested, with little to none sitting idly in cash. But if you rollover your 401(k) to an IRA, your 401(k) provider will liquidate your holdings and convert them into cash before making the transfer. Then, your IRA will receive cash only.
The problem arises when investors are unaware of this standard operating procedure. If you assume that all of your investments will roll over as-is, you may not even look at your statement. Meanwhile, your money will be sitting in cash, earning extremely low returns.
Over a period of time, you could end up with tens of thousands or even hundreds of thousands of dollars less than you might have if your assets remained invested.
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According to Vanguard, a rollover at age 55 could result in $130,000 in lost wealth by age 65 if the assets remain in cash. Overall, Vanguard estimates that investors lose at least $170 billion per year in retirement wealth making this simple mistake.
But the $130,000 that Vanguard suggests investors could lose could be understated. Here’s the math behind the omission in black and white.
Imagine that you have a retirement account worth $250,000 and you keep it in cash for 10 years. If it earned the average savings account rate, which was just 0.46% as of Sept. 2024, you’d end up with $261,766.30. But if you earned 10% instead, which is the approximate long-term average return of the S&P 500 stock market index, you’d have $676,760.37. That amounts to a loss of about $415,000 in just a single decade.
If you’re thinking this is a rare occurrence, you’d be wrong. When Vanguard looked at IRA rollovers completed in 2015, it found that 28% of account holders still had their money in cash — seven full years later — in 2022. Even the “typical” account holder still waited a full nine months to reinvest their funds.
How To Avoid This Simple Yet Common Error
In many cases, investment mistakes can be fixed.
If you pick a bad investment, you can always sell it and buy a new one. If your asset allocation is off, you can increase or decrease your risk going forward. But if you let your assets sit in cash for an extended period of time — particularly in an IRA, where liquidity is not a priority — you could literally be ruining your chances at a comfortable retirement.
But the good news is that there’s a simple fix for this error. If you check your account statements regularly, you can avoid this unfortunate situation. As an investor, you should already be practicing this habit, but it’s particularly important to conduct a review any time you make a transfer.
If you feel as if you’re not knowledgeable enough to keep an eye on your accounts, or if you simply don’t want to take the time to do it, then it’s a clear sign you should be working with a financial advisor.
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This article originally appeared on GOBankingRates.com: The One IRA Mistake That Could Derail Your Retirement
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