With 401(k) Rollovers, It’s Not The Amount That Matters

When I started my first job out of college, it didn’t pay a lot of money.  I kept expenses low by splitting an apartment, driving my five year old car, and generally living the cheap, bachelor lifestyle.  As such, I was still able to contribute a few bucks to my 401(k) plan.

When I say ‘a few bucks’, I literally mean a few bucks.

Not only was retirement the last thing on my mind, but I wasn’t making enough to really be able to contribute a great deal.  The little bit I did contribute grew to a couple of hundred dollars.

I stayed at that first job for almost two years, at which point I realized it was time to start making more money.  So, I took a job that offered an almost 50% increase.

After a few months, I got a check in the mail from my old employer.  I guess I had received a letter or two telling me that I could roll my 401(k) over into my new employers plan or an IRA, but I didn’t do anything about it, so they sent me a check.

I had already started contributing to my new employer’s 401(k) plan, and it was actually a decent amount given the raise.  But, at the end of the year, the person that does our families taxes called and asked what had happened to the balance of the original 401(k).  I told him I had just taken the money, but that it wasn’t a big deal because it was only a couple of hundred dollars.

He wrote me back advising that I never do that again.  The lesson became clear when I read that it wasn’t so much the amount, it was the practice.

By taking the cash, I potentially established a precedent in my mind of saying two things:

  1. That a small amount of money is OK to take off the table when it comes to retirement planning
  2. Saving for retirement can wait until later.

The problem, as it became clearer to me in the subsequent years was as follows:

  1. The definition of ‘a small amount of money’ will change over time.  When I left that first job for the higher paying job, I got a 50% bump in salary and I thought I was flying high.  Yet, that amount is still less than half of what I make today.  At any point, the salary and what we define as ‘a lot of money’ will change. Thus, in the end, the balance in our retirement fund doesn’t really matter.
  2. The earlier the better when it comes to saving for retirement.  I don’t feel that much different as a person than I did when I made that choice, yet fifteen years had passed.  If I had continued to kick the can down the line, I would always be promising myself to save later, but who knows when that would have started?

I learned my lesson and I’ve never failed to roll over my 401(k) since, even though it’s transferred nearly half a dozen times.

As a young 23 year old, I couldn’t understand what was ‘the big deal’ about a couple of hundred dollar retirement account.

As a 37 year old, I can now say:

I get it.

15 thoughts on “With 401(k) Rollovers, It’s Not The Amount That Matters”

  1. Excellent post. The penalty was probably 20 or 30 bucks, but the principle behind it was worth much more than that. I wish every 23 year old with $200 in their 401k would read this – it’s much more effective when someone is telling it firsthand.


  2. Thanks for sharing your personal story. I wish more people in their 20’s would realize the opportunity they have in front of them to really position themselves well for retirement. I get quite animated with people at work when they tell me they’re not doing anything with their 401(k) – explaining how they are leaving money on the table, missing out on compound interest, etc. The point is not to simply retire young, but to build up their stash of cash as a hedge against low market performance, poor choices, or any other unforeseen event. As you said: Even if it is a couple of bucks, it’s better to start now than to pretend that tomorrow will be a better day to start investing.

    • Tomorrow is always a better time to save and today is always a better time to spend if you believe everything you hear. Sometimes you just need the voice of reason to make sure you don’t fall into that trap.

  3. Oh, I wish I had seen this 8 years ago 🙂
    I had a very small 401k (about $4000) from a previous employer, and when I moved across the country for a new job, I cashed it out and went on a lovely Disney vacation with my husband and kids. Now…I’m worrying about having enough retirement savings, and am sad that I didn’t think through that decision 8 years ago.

  4. I have almost 1/3 more in my retirement fund than my partner, because I started depositing money 2 years before he did. Those early years make a huge difference in compound interest over time.
    I wish people would just listen…..Keep telling your story!

  5. I’m 26 and am just now starting to realize what you are saying in this post. Saving for retirement is important and I’ve started to plan for that now. I really wish I had understood what I do now 3 years ago. I would be in much better shape. Thanks for the post and hopefully it will help other young people.

  6. This is the nugget of wisdom I thought key ” At any point, the salary and what we define as ‘a lot of money’ will change. ”

    It’ so true. If we stick with thing and keep going, the income WILL rise generally, then we get used to it.

    I wish they’d bump the 401K contribution to 50,000$/yr! pre tax!

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