Rollover IRA: 2 Critical Reasons To Transfer Your 401k
Today I want to share with you two reasons why you’re losing money if you’ve ever changed jobs but have continued to leave your 401k with your former company’s sponsored plan.
Underperformance of Target Funds
The first critical reason is underperformance.
Most employees invest in Target Funds, and typically choose the estimated year they’re planning to retire.
So for example, if you’re 25 and your retirement age is 65, then those 40 years of working will bring you to a Target Fund year of 2060.
How well do Target Funds perform?
I took a look at Fidelity’s Target Funds and here’s what I found:
The average 5-year annual return for Fidelity’s Target Funds is around 8.8%. Meanwhile, compare that to the S&P 500 as a benchmark where the 5-year annual return is 11.7%!
By keeping your retirement funds in a Target Fund, you’re missing out on an extra 33% of unrealized gains every year!
Let’s push it out further to compare the performance over 10 years. Fidelity’s Target Funds achieved around 9.97%, while the S&P 500 returned 13.56% annually.
Over 10 years, that’s an average of 36% of extra gains that you’re missing out on ANNUALLY.
If you understand the power of compounding, you know that is a BIG DEAL.
Don’t let this major underperformance of Target Funds plague your retirement account and move your 401k to a Rollover IRA now.
High 401k Fees
The second critical way you’re losing money by not rolling over into an IRA is through fees.
If you’ve watched my other videos, you know that when you invest in funds, there’s something called the expense ratio that you have to pay the fund annually in order to manage your money.
So what’s the annual expense ratio for Fidelity’s Target Funds? It stands at 0.3%.
And at first glance, it really doesn’t seem like much…until you start to see how much ETFs typically charge.
If you rollover your 401k into an IRA, you can invest in almost any individual stock, mutual fund, or ETF.
So let’s say you swap your funds over and decide to invest in Vanguard’s VOO, an ETF that follows the S&P 500. What’s the annual expense ratio?
It is only 0.03%.
Compare 0.3% to 0.03% – that’s a 90% discount in annual fees.
If you have $100,000 in your retirement account, that’s a difference between paying $300 versus only $30 every single year.
Does $270 make a difference when it is compounded year over year? You bet it does.
So, there you have it. The two critical reasons why you must move your 401k account from your former employer to your own brokerage account’s Rollover 401k.
Because if you combine reason number one, the underperformance of target funds vs the S&P 500 by over 30% annually, with reason number two, the 90% discount in fees you’d receive if you do switch over, then the very clear takeaway here is to open up that Rollover IRA as soon as possible.
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Here’s to you investing in your knowledge and future in the Freedom of Choice lifestyle – I’ll see you soon 🙂
*Disclaimer: This is not financial advice – please talk to a financial consultant, accountant, or tax attorney before taking any actions with your retirement accounts.