Retirement savings warning: Leaving 401(k) or IRA money in cash could cut your nest egg by 75%

Financial mistakes are of two types — small mistakes and big crises, but retirement mistakes become very serious over time because they last for decades. The report by Kiplinger says people are now saving more for retirement, but many fail at the next important step — actually investing the money. The biggest danger to retirement savings is not market crashes but leaving money sitting in cash instead of investing it.

Millions of Americans move their 401(k) money into IRAs every year, but more than one in four people leave that money in cash. Leaving money in cash looks safe, but it can cost a huge amount over time because the money does not grow much. Example given: Two people each move $50,000 into an IRA at age 35.

Cash vs investment growth

Person A keeps money in cash earning 2% and ends up with a little over $90,000 by retirement. Person B invests in a diversified portfolio earning 7% and ends up with about $400,000 by retirement. That means keeping money in cash leads to a loss of around $300,000 over 30 years, as stated by Kiplinger. This loss is huge because the average IRA balance is only about $114,000, according to Employee Benefit Research Institute.

Job change confusion

Job changes make things worse because every time people switch jobs, they must decide what to do with their retirement accounts. Many people accidentally choose the wrong option and their retirement money ends up sitting in cash. Sometimes people are moved into cash automatically without even choosing it themselves. Data from Employee Benefit Research Institute shows 24% of IRAs hold too much cash or less than 10% in stocks.

Safe Harbor IRA risk

Many of these accounts are called Safe Harbor IRAs, which hold money in cash-like investments. Employers often move old 401(k) accounts into Safe Harbor IRAs when workers leave jobs. About 2 million accounts are transferred into these Safe Harbor IRAs every year. These accounts are meant to be temporary, but 75% stay there for at least three years, as cited by Kiplinger. Most people in these accounts are in their early to mid-40s, meaning they still have many years before retirement.

System is confusing

Earlier, pensions guaranteed retirement income, but now individuals must manage their own retirement savings. The retirement system is confusing, and many people do not understand how to manage investments. Frequent job changes may increase the number of accounts stuck in cash. By 2030, more than $43 billion could be sitting in Safe Harbor IRAs alone. Many cash-heavy retirement accounts exist because of confusion, not because people actually prefer cash.

How to fix it

Experts suggest checking all old retirement accounts and looking at asset allocation. If the account says “cash” or “money market,” the money may be losing value due to inflation. Another suggestion is to combine multiple small accounts into one to make tracking easier. Using target-date funds is also recommended because they automatically adjust investments with age. These funds help people stay invested for growth while lowering risk over time. The Kiplinger report warns that something that looks “safe,” like cash, can reduce retirement savings by up to three-quarters.

FAQs

Q1. Why is keeping retirement money in cash risky?

Keeping retirement money in cash gives very low returns, so savings grow slowly and may lose value due to inflation.

Q2. What is a Safe Harbor IRA and why does it matter?

A Safe Harbor IRA is a temporary account where old 401(k) money may sit in cash, which can reduce long-term retirement growth.