Wondering how on earth you are ever going to be able to afford to retire? You are far from alone. The looming retirement crisis will affect members of every generation. According to the link above, a mere 44% of US workers even have access to a retirement plan through their employers, and more than half of US retirees will have nothing but Social Security when they reach the age of 65.
This is in part due to the disappearance of traditional pension plans. With old-fashioned pensions (like your parents probably had), your employer took on the risk of your retirement investments. But now pensions have been largely replaced by 401(k) plans, where you assume that same risk.
A lot of workers do not really understand how 401(k) plans work. They also do not have the investment knowledge they need to balance their portfolios, minimize risk, and effectively grow their retirement accounts without an overabundance of fees. To top it all off, most people nowadays have a hard time holding onto a single job at a single company. We hop from one job to the next, leaving a slew of legacy 401(k) plans in our wake.
How much should you have in your 401(k)? The answer is the same for every worker: as much as you can afford. For most people living in the US right now, saving for retirement is an uphill struggle. Many of us have gotten a late start. We have spent periods of time unemployed or underemployed because of the recession. Inflation has made prices rise for products and services, but wages have stayed the same. Forty thousand a year is not what it used to be. That means we need to work extra hard to build a nest egg.
If you do end up moving from job to job, accumulating a lot of legacy 401(k) plans, you may wonder what to do with them. One idea is to roll them over into an IRA. Is it a good move? It all depends on your situation, but there are a lot of advantages if you roll over 401(k). Here are the main reasons to consider doing so:
1. You will consolidate your retirement plans.
The more 401(k) plans you accumulate over the years, the harder it can be to keep track of them all. But this is your money, and you should know at all times what is happening with it. Otherwise you have no idea whether you are financially on track or not. If you roll over all your 401(k) plans into an IRA, everything will be in one location, easy to track.
2. You will have more choices.
Overall, you will find that IRAs provide you with more investment choices. You may not always find the options you want (like those which you invested in with your 401(k) plans—which may be available or not, depending on the situation), but you will find more diversity in general. This can open up some exciting doors of opportunity.
3. You may pay fewer fees.
It is more efficient to invest through an IRA than it is to invest through a 401(k). This means that an IRA will usually be less expensive. You will pay lower fees, and that means more money you can set aside for your retirement.
4. You will be in full control.
If you feel antsy about your old 401(k) plans, it is with good reason. There are a lot of things which could potentially go wrong since your former employers control them, not you. If one of those companies should happen to go under while they are still in charge of your retirement savings, it is feasible that your money could be lost. But if you roll over all your accounts into an IRA, your money will always be in your hands. If your former employers find themselves in financial distress, it will not affect you.
5. If you do need to access your funds, it is generally easier.
401(k) plans are not exactly flexible when it comes to distribution. This can be a problem for you or your heirs. IRAs are much easier to access if you need to withdraw early.
Of course, you should also be aware of the potential drawbacks before you commit to rolling over your 401(k) plans into an IRA. You obviously cannot borrow from your employer’s retirement fund with an IRA. An IRA also typically requires a higher minimum balance than a 401(k). There is additionally a further potential danger should you end up in a situation where you are behind on your debts. Creditors can more easily seize money from an IRA than a 401(k). With an IRA, you may need to resort to declaring bankruptcy. With a 401(k), you have a lot more options to protect yourself.
There are a lot of good reasons to consider rolling over your 401(k) accounts into an IRA, especially if you have more than one and foresee yourself doing further job hopping in the future. Weigh the pros and cons and consider how your decision will impact your finances, and then make the choice which is the best fit for your situation.