The Great American Money Grab

With 10,000 baby boomers reaching retirement age every day, there is a scramble to grab a share of the largest money transfer in American history.  Retirees are moving their balances out of the 401k accounts of their former employers and are looking for a safe place to stash their retirement savings.

Every bank, investment house and insurance company wants a piece of this pie.

It’s a Huge Amount of Money

Money Grab

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Trillions of dollars will be transferred from 401k and 403b plans over the next 10 years and much of it will be reinvested.  Trillions more will be withdrawn from IRA accounts and there is more money invested in IRAs than 401k and 403b plans combined.  Because of the MRD (Minimum Required Distributions) requirement of an IRA account, people will have to withdraw the money, whether they want to or not.  Starting at age 70 1/2, retirees will have to withdraw a percentage of their IRA balance each year.  The MRD starts around 4% and goes up each year.

Salespeople are Standing By

There are a lot of commercials on TV lately, with retirees flying gliders, buying vineyards and jetting off to Paris.  If you have saved quite a nest egg, you may be contacted by a Wealth Manager.  Wealthy retirees are the Holy Grail for banks and financial companies, who are masters of following the money.  The more assets you have, the more they manage and the more they get paid.

There are also a lot of commercials on TV showing people who have lived to be over 100.  These commercials are put out by companies selling annuities.  Annuities are a fabulous opportunity, for the investment company.  Unfortunately, they aren’t always such a great investment for investors.  Unless you do live to be over 100, you will be much better served by asset based investments.

Retirees are Confused

Some of the people I know who are facing retirement are confused about their investment options.  Often, they have already been contacted by people looking to manage their transition.  Or, they have been steered towards investments by their existing 401k company, as they try to leave.  In any case, the advice they receive is rarely unbiased or in their best interests.  The laws are complex and the penalties steep for making a mistake.  It’s no wonder why they are anxious.

Tips for the Transition

Start Early – Start early researching investments, so you aren’t pressured into making decisions as you leave your job.  Some 401k accounts will allow you to stay invested after you leave the company, while others have a deadline.  The last thing you want is for the plan to send you a disbursement check and withhold 10% of your balance in the process.  Unless you come up with that 10% on your own and reinvest 100% within 60 days, you will get hit with very heavy penalties.

Research Investments – Very few people are comfortable with or capable of choosing a suitable retirement investment, but that is exactly what you need to do.  If you don’t feel you are up to the task, consider hiring a fee-only planner to make some recommendations.  If you have the courage to go it alone, most of the mutual fund companies can really help you out.  Not only do they have target funds setup specifically for retirees, they have associates who can handle the roll-over.

Watch for Fees – Engaging a commission-based financial advisor may seem free, but you will likely pay in the form of higher fees on your investments.  You may also incur redemption fees, which are designed to lock you into your investments until the sales commissions are recovered.  If you want to leave, you will incur a redemption penalty.  For investors with large balances, these fees can add up.

Keep Control – I can’t say enough times on this blog how important it is to keep control of your own assets.  Invest in some quality money manager software for tracking purposes.   If you transfer your 401k into an annuity, you may lose control of your funds, forever.  If you want to change companies or investment types later on, you will most likely be out of luck.  If you transfer it into a self-directed IRA, you can easily transfer to another IRA account later on.

Transfer Direct – Speaking of transfers, you should always have the money rolled-over directly from one qualified investment to another.  If you take possession of the money there may be 10% withholding and some heavy tax implications.  You don’t want to have to prove to the IRS that you reinvested your retirement savings and you don’t want to try to get your 10% back from the 401k administrator.  You are way better off doing a direct roll-over.

The Bottom Line

The bottom line is you may save for many years towards your retirement and you can’t afford to blow the transfer.  Find suitable investments before your last day at work and do a direct roll-over from your old retirement account to your new one.

“Money is always there but the pockets change.”

– Gertrude Stein

Recommended Reading

Don’t Quit your Day Job – Taking the Market’s Temperature
Online Investing AI Blog – Stocks and Retirement
Wealth Informatics – My Retirement Advice

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