7 months ago
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Americans are missing out on hundreds of billions of dollars in lost retirement cash because of a simple, forehead-slapping mistake in managing their IRA accounts.
That’s the conclusion of new research by Vanguard, the investment firm, into the lackluster performance of many individual retirement accounts.
The problem comes with rollovers, the transfer of funds from an employer-sponsored retirement plan to a traditional IRA when someone leaves a job.
Looking at IRA rollovers completed in 2015, Vanguard found that 28% of savers still had their funds in cash seven years later, in 2022.
One mistake costs investors $170b in retirement wealth
That act of omission, Vanguard estimates, costs investors at least $170 billion a year in lost retirement wealth.
Here’s the problem: When someone leaves a job and rolls over a 401(k) into an IRA, the money almost always arrives as cash, or a cash equivalent, such as a money market fund. Those accounts typically earn less than 1% interest a year, although higher rates exist.
To put the money back to work, the investor has to log in to the retirement account, or pick up the telephone, and re-invest the funds in the stock and bond markets.
Failing to do so, and leaving a rollover IRA in cash, costs an individual investor at least $130,000 in lost wealth by age 65, assuming the rollover happens by age 55, according to Vanguard research.
“A lot of investors mistakenly assume that reinvestment is automatic,” said Andy Reed, head of investment behavior research at Vanguard.
“The number of experts – and by experts, I mean people with PhDs – who we’ve talked to who said, ‘I did this, or my spouse did this, or my adult child did this,’ it’s been absolutely mindboggling," he said.
Stories of rollover IRAs wallowing in cash for decades, and missing out on hundreds of thousands of dollars in compound interest, are the stuff of nightmares, some financial advisers said.
A million dollars in lost savings: 'I'm sure I gasped'
Michelle Crumm, a certified financial planner in Ann Arbor, Michigan, recently took on a new client. The client was in her mid-50s. She had managed to save $200,000 in retirement funds in her 20s at a high-paying job.
“And it’s been sitting in cash,” she told Crumm.
Crumm did some quick math in her head. Over 25 years, at 8% interest, the client’s $200,000 would have grown to well over $1 million.
She did not share that figure with her client: What was the point?
“I always just try to take people where they’re at. History’s history,” she said. “I’m sure I gasped.”
Rarely, advisers say, does the personal finance world offer such an easy and potentially lucrative fix: