Retirement Savings Mistake: Costing Americans Thousands
New research from Vanguard reveals a critical mistake that millions of workers are making with their IRA rollover accounts, potentially costing them $130,000 or more in investment gains.
The Problem with IRA Rollover Accounts
Vanguard points out that a quirk in the retirement system mandates that individual retirement accounts convert all direct contributions and most rollovers into cash, making it a default option for IRAs. In contrast, 401(k) plans offer preset investment options like target-date funds. The issue arises when employees are unaware that their IRA savings are being converted into cash, a low-performing asset compared to stocks and other investments. This not only leads to missed long-term gains but also erodes savings due to inflation.
The Impact of Staying in Cash
According to Vanguard, 28% of IRA rollover accounts were still invested in cash seven years later, resulting in missed investment growth. Workers, especially younger investors, low-income individuals, and women, are most likely to keep their IRA savings in cash, potentially due to lack of awareness. Sticking with cash can be detrimental to retirement savings, as Vanguard’s research shows that those under 55 who opt for target-date funds could have $130,000 more in retirement assets by age 65 compared to holding cash.
How to Avoid the Cash Trap
To avoid this issue, Vanguard recommends checking your IRA account and considering new investment options such as stocks or mutual funds. Additionally, there is a push for legislation requiring IRA contributions and rollover funds to be included in Qualified Default Investment Alternatives, similar to 401(k) plans. While this change would require legislative action, it aims to help vulnerable populations build their retirement savings effectively.
By increasing awareness and actively managing IRA investments, workers have a better chance of accumulating savings that will lead to long-term returns and ensure a more financially secure retirement.
