We’re over a year and half into Covid and people are still resigning in droves. In fact, a record 3% of the American workforce left their jobs in August (that’s 4.3 million workers), leading economists to refer to this period as the Great Resignation. Some of these workers may have simply switched jobs, but not many, since non-farm employment only rose by 194,000 in September.
So what are people doing? We don’t know for certain. They might be working for themselves, working part time (4.5 million people reported being partially employed in September), or they might simply be taking a break since employee-reported burnout is also at an all-time high, with women suffering more than men.
What we do know for certain is most of these people will lose access to their singular way of saving for retirement: their employer-sponsored 401k. Once you quit, you can no longer contribute to your plan. So if you’re one of the millions of people who has resigned or is thinking about resigning, what will you do with your 401k and how will you continue to invest for retirement? Good news! You’ve got options.
Scenario 1: You’ve switched companies and your new employer offers a 401k
If you’re in this boat, you can choose to rollover your current 401k balance to your new employer’s plan or you can choose to roll it into an IRA. If you’ve researched your new employer’s 401k plan and you like the investment options, you’re comfortable with the fees, and if it accepts rollovers, rolling your current balance into the new plan could be a good option.
If you don’t like the investment options, if the plan doesn’t accept rollovers, or if the administrator charges high fees (or any combination of these reasons), then you can roll it into an IRA. If you choose to do nothing and keep your balance where it is, you won’t be able to continue contributing to that 401k, so you’ll need another way to save for retirement such as an IRA with Icon.
Icon’s retirement savings account was created using the best parts of the 401k and IRA to create a new type of retirement plan called portable retirement. Like a 401k, investments are managed for you. Like an IRA, it’s portable, and you have access to it wherever you go. And if you should decide to take a job with a new employer, they may support your Icon account.
Scenario 2: You’re working part time, you’re taking a break, or you’re working for yourself
If you no longer have access to a workplace retirement plan, that’s ok! You don’t have to push off saving for your future. Even small levels of contributions, once invested, can make a huge difference in later years.
So, you can always choose to keep your 401k where it is and also open an IRA to continue building your retirement savings, but unless you have a large balance and a great plan, 401k fees could eat so far into your savings they all but disappear. The better option is to roll your 401k into an IRA like Icon’s retirement savings account. This way, you continue to contribute to your future, all of your money is in one place, and high fees don’t erase your hard-earned savings.
Like we said above, Icon’s retirement account is plan that offers the best functionality from 401k and IRA accounts. Plus, it’s portable, can be managed from your phone, and can be adjusted to fit all the career decisions you’re likely to make throughout your working life.
The Nuclear Option: Cashing Out
With any of these scenarios, there’s always the option to cash out your 401k. But here’s why that’s not such a good idea:
- You’re not only going to pay income taxes on the distributed amount with a traditional 401k, but you’re also going to pay a 10% penalty.
- You won’t be saving for retirement unless you open a new retirement savings account.
Right now, more than 50% of both men and women think they’ll have to work part time in retirement given their current savings rate (according to a survey by T. Rowe Price). And 21% of men and 31% of women think they’ll run out of money in their later years. That doesn’t have to be the case.
On average “the market”, which is a commonly used term that refers to the world of traditional investments like mutual funds and ETFs, grows at a rate of 7% per year. That means if you invested $100 the first year, you would earn $7. But that’s not all. Without contributing another dollar to your account, your earnings would start earning money as a function of what’s called “compounding”. Take a look:
It’s all about compound interest. Use the slider to see how what you set aside today can grow over time.
What you set aside today
Adds up over time with compound interest*
The above example assumes there are no additional contributions to your account. To see the effect of compounding on various contribution levels, check out this calculator from the SEC.