Sometimes, a tempting offer may make you rethink your 401k rollover strategy…
Archie wants to know:
I am seeking for your insight advice to roll over my 401K. I just got lay off two months ago. I am 37 years old with 2 kids. One insurance company, North America, is giving me 11% bonus to my investing lump sum to open an IRA account but have to stay with them 14 years. I do not know if I should invest my money to this insurance company or go somewhere to invest to get more return for my kids later to go to school. Please give me some suggestions as to where should I go to have my money invested and what types should I go base on my age.
First, make sure that they are actually going to invest your money and letting you keep the return during the 14 years that your money will be held hostage. An 11% bonus sounds amazing, but it’s not worth your money if there’s no growth for 14 years. To illustrate this point further, let me give you a reference. 1% annual growth for 14 years becomes 15%, which is much more than 11%.
If they do invest
The Risk of Losing it All
Also, 401k funds are yours, and will be yours even if the managing company goes bankrupt. Make sure that this is still true if you roll it over to that insurance company. Since they are offering a 11% bonus, I have a feeling that there’s something fishy behind this. Remember, companies and salespeople are out there to make money. Never trust them when they say they want to help you, because it’s simply not true 99% of the time.
The bottom line is that at first glance, 11% is a huge bonus. In 14 years though, and the incentive becomes minimal. Do your due diligence and make sure you know EVERYTHING. If you are uncomfortable knowing everything you need to ask, I would skip this offer. As the old saying goes, when it’s too good to be true, it’s usually bad.
I like simplicity, and one of the simplest way to handle a rollover is to roll it to a traditional IRA. Once it’s rolled over, which is as easy as filling out a form, you can start investing as you did in your 401k. You may need to research a bit on asset allocation, but the basic rules for any investment account applies.
Also check out a post I wrote about some 401k rollover alternatives I considered when I quit my job to pursue my business. Click here to read it.
A Little Note about Asset Allocation Basics
You mentioned that you’d like to know what investments are good for you. A good place to start is the asset allocation article from the government entity, Security of Exchange Commission (SEC). The gist of it is that the longer your time horizon (ie, the younger you are), the more aggressive your investment should be, but head over there to soak up all the details. Start here to read the article.
Got a burning money question you want answered? Don’t substitute my opinion with expert advice, but contact me and I will do my best to give you a second opinion.
Editor's Note: I've begun tracking my assets through Personal Capital. I'm only using the free service so far and I no longer have to log into all the different accounts just to pull the numbers. And with a single screen showing all my assets, it's much easier to figure out when I need to rebalance or where I stand on the path to financial independence. They developed this pretty nifty 401K Fee Analyzer that will show you whether you are paying too much in fees, as well as an Investment Checkup tool to help determine whether your asset allocation fits your risk profile. The platform literally takes a few minutes to sign up and it's free to use by following this link here. For those trying to build wealth, Personal Capital is worth a look.