Shocking 401K Statistic

Reading a Money Magazine arti­cle on the best moves for mil­len­ni­als to build wealth, I came across this shock­ing sta­tis­tic about how the 25–34 year old age group treats their 401K’s when they switch jobs:

More than half of work­ers in their twen­ties who leave a job do not roll their 401(k) into an IRA or their new employ­er’s plan, says Aon Hewitt. Bad move: On a $10,000 bal­ance, you could be left with just $7,000 after tax­es and penal­ties. If, instead, you keep that mon­ey grow­ing at, say, 6% a year, you’ll have an extra $100,000 or so by the time you retire.

That’s just crazy! I believe it’s part­ly because peo­ple don’t know what to do with the mon­ey and that they don’t inter­nal­ize the long term impact of not rolling it over. Face it. It’s eas­i­er to spend the mon­ey than wor­ry about retire­ment, some­thing that’s going to hap­pen so far in the future. It’s very easy to ratio­nal­ize the deci­sion and fig­ure you’ll start again with your new employ­er’s 401K.

The Elephant’s Paycheck is some­thing to do with the mon­ey, so we got that cov­ered (please sign up for the free email course). Let me help you inter­nal­ize the impact of with­draw­ing your 401K instead of rolling it over.

If you’re under 30 years old and fol­low the Elephant’s Paycheck, by the time you retire you could have the full bal­ance returned to you each and every year in retire­ment. You’d be giv­ing up $10,000 in income a year (in the exam­ple above — more if your 401K bal­ance is high­er), at least, for every year in retire­ment. That’s pow­er­ful stuff.

The exam­ple above, grow­ing at 6% a year? That’s old school.

Think about the pay­check. Think about your Elephant!

Rollover your 401K into an IRA, set­up a few div­i­dend aris­to­crats to rein­vest, and track your rais­es. That’s build­ing wealth over the long haul. And, by the time you get to retire­ment, the $10,000 bal­ance men­tioned above will give you a $10,000 pay­check each and every year. Unsure of the math? Check out this com­par­i­son between Apple and Microsoft to see the dif­fer­ence in judg­ing prin­ci­ple growth (how much mon­ey you have) as com­pared to div­i­dend growth (the pay­check your Elephant brings home).

PS If you are con­sid­er­ing rolling your for­mer employ­er’s 401K over, please don’t roll it into your new employ­ers plan unless your new employ­er has an unusu­al­ly good plan (pos­si­ble, but rare).