The Rollover Mistake That Costs Cooperative Retirees Significant Money

Everyday cooperative employees retire. Some of these retirees take the lump sum option and "rollover" that money to an Individual Retirement Account (IRA) or they "rollover" that money into their NRECA 401k. They may be working with a financial advisor or they may have decided that they don't want to pay an advisor and they want to do it themselves.

This blog is speaking to the do it yourselfers.

What is a rollover?

First let's define what a rollover actually is. A rollover is moving retirement money from one account type to a different account type.

Examples of a rollover:

1. Moving you lump sum pension to your NRECA 401k.

2. Moving your R&S lump sum pension to an IRA.

3. Moving your NRECA 401k to an IRA.

In these examples you are moving your pension and/or 401k money to a different type of retirement account. These are considered rollovers.

Sometimes you will here the word transfer used interchangeably with the term rollover, however, they aren't the same thing. A transfer is when you move a retirement account to the same type of retirement account.

Examples of a transfer:

1. Transferring an IRA to a different IRA.

2. Transferring a current 401k to a different 401k.

The key difference between a transfer and a rollover is that transfers are used to move funds between the same account type, while rollovers are used to move funds from one type of account to another.

There are different types of rollovers and transfers but I don't want to get in the weeds on this topic. I want to share with you the mistake I see often when cooperative retirees rollover some or all of their R&S Pension Money into their 401k or an IRA.

What is the mistake that could be costing you big money?

The mistake is rolling that money over and assuming it's automatically invested. When you make a rollover, that money goes into a general settlement account and sits their until you go in and choose the investments you want that money to be in. If you do nothing that money is basically held as cash until you change it.

You may see on the news the market is doing great and then when you look at your statements your money isn't growing. The reason could be because it's still in a cash account waiting for you to tell it what to do. Don't ever assume your rollover money is automatically invested the way you want it to be or the way your current money in that account is invested. That's is almost always not the case.

Here is a real world example:

Bob retires from NRECA and takes his $1,000,000 (one million) R&S Lump Sum in a single cash payout and rolls it over to an IRA that he is managing himself. He completes all the paperwork to process the rollover and the money is rolled over to his IRA in a few weeks or so.

Bob's one million dollars is now in his IRA but Bob hasn't even looked a statement in a year or so, but he knows the market his doing good and is up by 10% this year so he assumes he must be doing good too.

Bob assumes he made $100,000 this year but when he opens his statement he only sees a $15,000 gain? Bob is confused and angry.

Bob assumed that money would be invested, but it wasn't because Bob didn't actually choose investments in his IRA for that money. It's been sitting in a cash account paying him 1-2% for the last year.

Who is to blame here?

The answer is... Bob has no one to blame but himself. But hey at least he didn't "waste" money paying an advisor :)

Let's say Bob didn't look at his statement for 5 years, this mistake could have cost Bob $500,000 or more!!!

If you are a do it yourselfer, then you are responsible to disburse the rollover money into the investments of your choice.

Conclusion

This mistake happens to millions of people ever single day. Don't let it happen to you.Work with a financial advisor you trust or if you choose to do it yourself, make sure you do it!

You need a plan

If you're interested in "beating the market" or finding the next "hot stock" we can't help you.

If you're interested in creating a goal-focused, long-term plan to ensure you don't run out of money in retirement we can help you.

We create and manage retirement income and investment plans for electric cooperative retirees to ensure the money you have saved lasts the duration of a 20-30 year retirement and beyond.

We work to ensure the money you need in the early years of retirement is safe and not subject to temporary market fluctuations, while at the same time putting the money you'll need in the later years of retirement in a position to receive the permanent market returns necessary to provide an income that increases and outpaces inflation.

For more articles about retirement planning and investing click here.

Brian Coleman/Electric Cooperative Retirement Specialist

80/20 Financial Services is an Independent Registered Investment Advisor (RIA) registered in the state of Missouri (CRD# 300772). We help electric cooperative employees in Missouri and throughout the United States transition into retirement. Being independent allows us to work exclusively for YOU.

Photo by Francisco De Legarreta C. on Unsplash