The Five Biggest 401(k) Rollover Mistakes

Personal finance guru and author David Bach offers some useful thoughts on 401(k) rollovers — the process people use to move their 401(k) money when they leave an employer. Here’s his list of the biggest mistakes people make when rolling over a 401(k):

1. Cashing out.
2. Leaving your money behind.
3. Not taking the “direct” route.
4. Making hasty decisions regarding company stock.
5. Going it alone.

Of the entire list, the most stunning is how many people cash out their 401(k)s when they switch jobs: “The last thing you should do is tap into your retirement savings simply because you’re changing jobs and you can. Yet according to Hewitt Associates, 45 percent of employees do this. What’s worse is that 69 percent of employees between ages 20 and 29 cash out — and this is the group with the most to gain from long-term compounding.”

Sure, it’s basic information, but as one commenter states: “This is common sense advice, but you’d be surprised how many people don’t have common sense.” Fortunately, all these problems are easy to avoid and Bach offers simple suggestions for each of them.

The Five Biggest 401(k) Rollover Mistakes [Yahoo Finance]
(Photo: Paul Keleher)

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  1. remusrm says:

    this advice is always from people that have money now… just see how will they react if they were in the same bowl…

  2. Beerad says:

    Um, I’m in that bowl, have been paying into my 401(k) for four years, plan on changing jobs within the next five, and have no intentions of withdrawing any money until I retire.

    And of course the advice is from people that have money — why would I take advice from someone who bankrupted themselves in retirement through bad savings decisions?

  3. RandomHookup says:

    @remusrm:

    True, but way too many people act hastily and just spend it because it’s there. (and I think you mean ‘same boat’)

  4. babaki says:

    bad savings decisions are one thing. but people who are just out of college, not living at home, and are just starting their careers don’t always have the ability to save up a large amount of money. unless of course mommy and daddy bail out your student loans.

  5. jtlight says:

    I’m just out of college, and I’m putting away what I can towards long-term savings. It has nothing to do with saving “large amounts of money.” As a 23 year old, ANYTHING, and I mean anything, you can save will end up being a large amount. The more you save early on, the better off you’ll be. To many young people are trying to attain their parents standard of living instead of thinking about the future.

  6. MonkeyMonk says:

    I cashed out my 401K when I left my first job back in the mid 90s. I hadn’t been there long so it was only 4-5 thousand dollars but I was also very poor at the time and that money felt like winning the lottery. I should probably regret this decision but at the time is was oh so worth it. I did manage to get my act together by my late 20s and my retirement fund is doing great now.

    So many of these “frugal living” sites focus so much on saving for life past 65 that I think they sometimes neglect the joys of living during other ages too.

  7. ceejeemcbeegee is not here says:

    I cashed out of my teachers retirement plan when I quit at age 27, used that money to buy my first apartment building, collected rent for 5 years, then sold it at the market peak for 5x what I paid for it, then re-invested in more real estate, stocks, and commodities. If I had just rolled that money into an IRA it would just be sitting there, collecting dust and about 2% a year. So cashing out can be a good thing.

  8. Charles Duffy says:

    One thing I don’t get — why start the long-term savings before the house is paid off? If the compounding interest I pay on my mortgage, after adjusting for the tax deduction, is more than the compounding interest I would make on a retirement account (no employer matching dollars or any such thing — I work for a startup)… why would I not put every spare cent into paying off the mortgage as quickly as possible, and only when that’s done start on a retirement fund?

  9. Beerad says:

    @ceejeemcbeegee: Say, can you let me know when the next real estate market bubble’s about to start? Because I would totally love to get in on that.

    While I applaud your story, I would suggest that real estate speculation is not the most reliable way for people to invest for retirement. And I don’t know about your IRA, but my returns are a lot closer to 7 or 8% on average.

  10. B says:

    @Beerad: It’ll start in about 5 years.

  11. Beerad says:

    @Charles Duffy: As always, your mileage may vary, but it’s a tax issue for a lot of people. As you note, there’s a tax deduction for mortgage interest. There’s also generally a tax benefit for paying into a 401(k). Mortgage rates are generally lower than a good investment in the long term (like a market index fund), so theoretically it makes more sense to invest as much as possible and only make the mortgage payments as they come do. Really bad idea in practice due to market fluctuations and risk factors, but over the long run it should show positive returns.

    It’s the whole “bad debt” vs. “good debt” thing. Student loans have even better rates than mortgages, which is why it’s usually preferable to pay them out over the life of the loan and put your extra money to work reproducing in the meantime.

  12. sonichghog says:

    Remember, Some people do not choose to leave thre job. Cashing out may be the only way a person has to keep there home.

  13. MENDOZA!!!!! says:

    two words: emergency savings.

  14. protest says:

    @babaki:

    i’m a year out of college, pay all my own students loans, and live in an expensive city, but i still put away $100 a month directly from my pay into my 401K. there is no excuse for not saving something every month, even if it is a tiny piece. you don’t have to be a spoiled kid to save money.

  15. anatak says:

    @Charles Duffy: Sounds like:
    A> your mortgage interest is too high
    B> your retirement account returns are too low
    C> both.

    Its got nothing to do with “god debt/bad debt” BS. There is no reason why you can’t save for retirement (10-15% of income) AND pay off the house early. Start saving early, avoid debt, do better in the long run. Houses will come and go. Home prices will do God knows what. I wouldn’t want to put off saving for retirement based on my housing situation.

  16. theblackdog says:

    I just put 15% of my paycheck directly into my “401(k)” (I work for the Federal Govt) and they make it so hard to draw out before retirement, I figure it can sit there and make some good returns for me. I may be a bit cash poor now, but I’ll be better off 30-40 years from now.

  17. SOhp101 says:

    @remusrm: Having money/saving money pretty much compounds on itself. You just gotta start with the saving part first.

  18. ceejeemcbeegee is not here says:

    @Beerad: I agree, speculation is dangerous. The key is to get educated and get moving. You can see the writing on the wall if you know what to look for.

    401ks are great for some, but I’m just more risk-tolerant than others, I suppose.

  19. lincolnparadox says:

    @anatak: While I lean towards the “try and at least save something” camp, it seems that trying to save money and gain 4% is silly when you’re losing money on 8% (or more) interest every year.

    I’m not saying “don’t save.” But if you’re flushing $10K every year on interest, it might seem like a good idea to cash out your 401K when you switch jobs. The key is, once you pay off your debt, to shift what you would have paid in interest, into accumulating savings.