Things are different now. Decades ago when you took a job, you stayed with that company for a long time, often for life. Today, studies show that the average American holds over eight jobs between the ages of 18 and 45. Because of that, many are asking the question during job transitions, “what do I do with my retirement benefits now that I’ve changed jobs?”
Today, you may have retirement benefits in a variety of different accounts. You may have a 401(k), IRA, 403(b) or a privately held pension plan especially if you’re a federal, state, or government employee. It would make sense (where possible) to consolidate all of these accounts in to one fund, right?
It’s a good idea for these reasons:
- Having all of your accounts consolidated in to one account is much easier to track and analyze.
- You pay much lower fees. Every fund charges a variety of direct or indirect fees and on relatively small amount balances, the fees could eat up any of the returns generated. So the fewer the retirement accounts, the fewer the number of funds you are invested in and the lower your overall fees. Within a fund you should also look to invest in a low cost index fund, which has much lower fees than other fund types and over time studies have shown these funds to have comparable returns to actively managed index funds.
- Company sponsored retirement accounts (e.g 401k) often limit the kinds of investments you can make. Trying to do research on the investments options in each of your retirement funds is difficult if not impossible.
- You would have complete control over how the money is invested.
- Future moves are easy. You just have to make one transfer request every time you switch jobs
Thanks to technology, making the transfer is quite easy. Just call up the fund you want to move your funds to and they’ll ask you a few questions and help you submit the required paperwork to get the transfer made. If everything goes to plan, you should have the funds into your primary retirement account within a few weeks. The only downside to moving to single retirement account is you may have less fund options, but with the major providers of employer sponsored retirement accounts (Vanguard, Fidelity and the like) you still have nearly one hundred funds to choose from which is plenty.
Transfer guidelines
Different types of accounts have different redemption and transfer policies (your retirement account provider can help you with this). But DON’T have a check written to you and place it in to a personal account. Although the IRS allows you to take possession of your retirement money for a small amount of time, it is better to set up your new account and have the financial institution holding your money directly transfer it to your new account. There are stiff penalties (link to early withdrawal) if you cash out your account before retirement age.
How should I manage my Master or Primary Retirement Account?
If you don’t have the time or the knowledge to manage your own retirement account, nearly all banks and brokerage houses have advisory and management services that will help you with your retirement funds. The advantage of this is that it puts all of your retirement funds in to one making evaluation and tracking much more easier and efficient.
If you feel confident enough to manage your own retirement fund, open an IRA account. Once all of your money is transferred to this account, you can manage like you would any normal investment (but with the tax benefits). All types of investments, including stocks, bonds, options, mutual funds and many other investment types are available to you and trading costs are quite low with some of the newer equity brokers on the block.
How Should I invest it?
First, the standard disclaimer: You are an individual with individual risk tolerances and financial situations so there is no one strategy fits all solution but here are some tips if you are going to manage it yourself:
1.) Be safe: If you enjoy short term, adrenaline-rush style stock trading, have a separate account with money that isn’t slated for retirement. Your IRA should be safe, low cost, long term investments that will grow each year
2.) Beat inflation: You could put your retirement money in to government bonds and other ultra safe investments but if they don’t beat inflation, you aren’t building up your retirement savings. In fact, you’re most likely losing money although your statements won’t show it. You should take some risk in correlation with your age
3.) Diversify: The old investing adage holds true. Don’t put all of your eggs in one basket. Invest in different sectors, different types of investments, and different behaving stocks.
4.) Get help: Consider having a financial advisor who will look over your portfolio to help you get proper diversification if you need help. If you have more than $250,000 in your retirement account you should get some guidance on your portfolio to make sure you are on track and getting a good relative return.
5.) Watch your fund! Setting it up and not managing it is a recipe for big losses. Watching it doesn’t mean that you will make frequent changes but you should know when it has good and bad days. As a general rule, check your retirement account monthly (online) and look to do a detailed review and make adjustments on a quarterly or semi-annual basis.
If you want to invest primarily in stocks, here is one formula to do that:
1.) Make sure your stocks have a high dividend. You’re going to hold it for a long time so make sure it’s paying you for your loyalty. At least a 3% dividend yield is reasonable.
2.) Make sure it’s a well-known company. No penny stocks, no start-ups. Go with the big names that have little risk of going out of business.
3.) Learn about covered calls. This is a very easy options strategy where you basically rent your shares of stock to somebody else. In turn, you get paid a fee up front.
That’s it! Set up your new retirement account and then start the process to get them transferred. You’ll be happy to see the funds in one place. Less hassle and more longer term gain hopefully!
Putting all of your retirement investments into one account makes a lot of sense, much easier to manage. However, make sure you understand the tax implications of selling or transferring assets from one type of retirement account to another. For example, there are a lot of people recommending using Roth IRA’s. However, if you move assets from a standard IRA or your 401k to a Roth IRA, it is a taxable event that may cause you to pay additional taxes. Moving to a Roth IRA could make a lot of sense in the long term, but just be mindful of the potential tax consequences!