IRA: Need a Default Investment Option?
Key takeaways:
– Workplace plans like 401ks have the advantage of automatic paycheck deductions and investments, which facilitates dollar cost averaging
– 28% of IRA rollovers stayed in cash for the first twelve months, which is detrimental to long-term investment growth
– The longer your investment time horizon, the greater your odds of success:
– Market is up 56% of the time daily
– 63% monthly
– 75% yearly
– 95% over 10 years
– 100% over 20 years
– Consider breaking the amount into smaller chunks and investing over time to mitigate risk
– Leaving retirement funds in cash, especially during working years, is a mistake that may cost you in the long term
IRA: Need a Default Investment Option? Links:
Catch all our Mullooly Asset videos here
Subscribe to the Mullooly Asset YouTube Channel
A Wealth of Common Sense
Vanguard article
IRA: Need a Default Investment Option? Transcript
Don’t make this mistake with your 401k…
Vanguard recently did some research advocating for IRAs to have default investment options as do workplace plans like 401ks, 403bs, or 457s.
The beauty of the workplace plan is twofold, because your money gets automatically deducted from your paycheck and then it automatically gets invested into whatever investment you choose. It automatically dollar cost averages into these investments, if you let it.
Dollar cost averaging is great because it takes the burden of deciding “when to invest,” off of your plate and just does it automatically. No matter what the market is doing – up, down, or sideways – you’re buying shares along the way, which is going to work out in your favor over the long term.
Now let’s talk about IRAs or individual retirement accounts. These differ from workplace plans. These are usually a landing place for old workplace plans, or you know you retired and you’re 59 and a half and you want to roll it over from your 401k into an IRA.
Maybe you got a new job and they’re forcing you to take it from the old plan and put it in an IRA. Now this is where the Vanguard research really found that having a default investment option similar to a 401k inside of an IRA would benefit investors because 28% of IRA rollovers stayed in cash for the first twelve months.
Leaving it in cash is really the worst thing that you can do.
It really costs yourself to not be invested over the long term.
Let’s take it one step further though and say you retired, and you are rolling the money out of the 401k into the IRA.
So the mechanics of that again are important: from the 401k they’re going to need to sell the investments, put it in cash, cut you a check, most likely mail you a check, and then you’re going to have to get that uploaded to whatever custodian you choose.
That is going to take some time, and you’re going to be getting out of the market and then you’re going to have decide when to get back in the market. And something we commonly hear is you know maybe this isn’t the best time to be putting money to work, how should we invest this lump sum of money?
And it really comes down to time horizon. If you have a short time horizon, or you’re planning on pulling the money out and spending it down to live off of to pay your expenses, then that’s a different story. The longer your time horizon the greater your odds are of having a positive outcome from investing that lump sum.
The market is up on a daily basis 56% of the time, basically a coin flip.
The market is up 63% of the time on a monthly basis.
On a yearly basis the market’s up 75% of the time.
Over ten years the market’s up 95% of the time.
And over twenty years the market’s up 100% of the time.
So like I said, the longer your time horizon the greater your odds of success.
But let’s say you’re still nervous, you still want to mitigate some risks, what can we do besides leaving it in cash? Well, you can break it up into smaller chunks and average in over time.
Let’s say you have a $1 million IRA rollover check, you can break that up into $200,000 chunks, invest $200,000 every two months, and over the course of ten months, you will have that invested. And that way you don’t have to pick a specific point in time, you kind of do things automatically, and spreading it out definitely lowers the risk that you’re taking.
Don’t leave it in cash especially if you’re in your twenties, thirties and forties, if you’re in your working years, if you’re in your accumulating and savings years. If you want to talk about how to get that money invested, we’d be more than happy to help.
So that’s going to do it for this week’s episode. Thanks as always for tuning in!
