To determine how important rolling over defined contribution (DC) plan assets to an individual retirement account (IRA) or another DC plan at job change versus cashing out is to the current state of retirement income adequacy, the Employee Benefit Research Institute (EBRI) used its Retirement Security Projection Model (RSPM) to compare projected retirement deficits of U.S. households in the current state—where there are rollovers into IRAs from defined contribution (DC) plans—versus a hypothetical state where workers never rollover their DC money to an IRA at job change but instead always cash out assets that are not retained in a defined contribution plan.
This impact of rollover analysis focuses on five-year age cohorts from age 35 through age 64. It finds that for the youngest workers, the absence of any IRA rollovers has a very material impact on retirement deficits: EBRI projects that the baseline average retirement deficit for that age cohort of $49,182 would increase by nearly half (46%) to $71,786 if IRA rollovers were assumed never to occur. A similar magnitude of increase in deficits is seen for those ages 40 to 54, ranging as high as a 52% increase in the projected retirement deficit for the ages 40 to 44 cohort.
While the projected increase in retirement deficit is lowest for older workers, EBRI found it is still material. For those ages 60 to 64—who have the lowest opportunity to experience job change (and therefore roll over) due to time remaining in the workforce—the deficit would increase by about one-third, from $44,055 to $58,893, if IRA rollovers did not occur.
EBRI says these findings highlight the importance of keeping money in the retirement system—and avoiding leakage at job change—when it comes to retirement deficits for U.S. households.
And they are right, the earlier you get money into your retirement funds and the longer you can keep them there the better off you'll be come retirement.
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