The Easy Way Out of Your 401(k)

I was pleasantly surprised to run into some readers last week. Sure every “reader” was a relative that was forced to see my posts on their news feed, but it was still nice to have people to call readers. One of these readers asked how I would invest the proceeds of a 401(k) that they were recently forced to liquidate. This particular situation arose out of an employer going out of business, but you could find yourself in a similar situation if you change jobs and want to move the money from your old employer’s 401(k) into something better. So, here are my tips with what to do. Just keep in mind that I am not a professional and can only answer with what I would personally do. I am going to stay brief but will add links to resources that have more details on each topic, and for those that just want the easy button scroll down to “Is there an Easy Button?”

What Type of Account Do you Need?

If you are not full retirement age and you want to move your money out of your 401(k) you need to move it to a IRA of the same kind. If you have a Traditional 401(k) you need to open a Traditional IRA. If you have a Roth 401(k) you need to roll over to a Roth IRA. Just keep in mind that if you received a check from your 401(k) then you have 60 days to get it into an IRA before you will experience tax penalties that can be severe.

When Do You Need the Money?

If you need to spend all the money in the next 2 years I would probably just put it into an IRA and leave it in cash or put it in something very conservative like BSV, Vanguard’s short term bond fund in the IRA. If you don’t need the money for a while you can take some more risk and likely make more profit. For the purposes of my answer I am going to assume that you don’t need any of it for at least 5 years.

What Investment Would I Pick?

There is this massive debate about whether managed mutual funds or passive index funds do better in the long term. Investment professionals get very passionate about it and often spend their whole career fighting about it. I think the debate is so difficult because from my view both seem to be right in different scenarios.

Essentially, an index fund is a type of investment that helps you indirectly buy little pieces of all the companies that meet certain criteria. For example, if you want to own a piece of every public company in America VTSMX, Vanguard’s Total Stock Market Index fund, holds 3,654 companies and makes it possible for you to own a piece of each one with an investment of just a few thousand dollars.  With funds like this, there is no one making qualitative decisions about which companies to own. If a company is large like Apple then it will be held as a large portion of the fund. If a company is small it will be held as a small portion of the fund. This simple and straightforward approach is great because it keeps your costs low, minimizes taxes, makes sure that you catch any big winning stocks, but is broad enough to make sure no bad stock ruins your account.

Managed funds have a person or set of people actively picking what stocks are good to own. This usually results in higher fees to pay the managers, to pay transaction fees, and  higher taxes when the managers change one stock for another. The goal is that the managers are good enough to make enough extra money by wise stock selection to cover costs and still have a better return than an index fund. These are great because sometimes markets get out of sync and good managers can take advantage of this.

You and I are not going to solve the index vs. managed debate here and now. Both styles have done better in different periods, and my opinion is that you should do whichever you feel you will be more consistent with. My personal approach has been to do a little of each. So, if I was in the exact same scenario I would probably do 50% into managed and 50% into passive index funds like and S&P 500 Index Fund or a Total Market Index Fund.

Can I Invest with One of the Best Managers Ever?

This person was considering investing with Warren Buffett by buying Berkshire Hathaway stock. Typically I would never recommend putting all your account in one stock, but this is one stock that it may actually make sense to put a large portion of the account into because it behaves more like a mutual fund. Berkshire is a holding company which means that it owns pieces of many other companies. Last time I checked Berkshire Hathaway held pieces of 44 different companies. Owning this stock is really like owning an actively managed mutual fund and having some of the best minds in investing managing it. However, even Warren Buffett himself recommends putting money into index funds rather than managed mutual funds or his own company. It seems hypocritical but he has many good reasons for saying it. So, to sum up my 50/50 idea I would put 50% into BRK.B for my active fund and 50% into VTI for my passive fund. I wouldn’t do BRK.A since you need $300,000 to buy one share and both BRK.A and BRK.B will have the same percentage returns. Please do note that this is still a high risk portfolio and I would only do it if I didn’t need the money for a minimum of 5 or ideally 10 years.

What Broker or Bank Should I Use?

I have personally used Vanguard, Schwab, TdAmeritrade, Interactive Brokers, C2Broker, and Robinhood. For most people I recommend staying with Vanguard or Schwab. There are other good options out there but these are the ones have I have personally used. I still like the other brokers I have listed, but they are probably only for those who want to actively buy and sell investments frequently on their own. Virtually any Broker will have the capability of buying BRK.B and VTI.

Is There an Easy Button?

You may be thinking, “Charlie that is great and you have given me a lot to think about, but I have more questions than answers.” Here is my straight forward no thinking on your part answer not calculation percentages each year. This is the set it and forget it option. Go to this link for Vanguard, follow the steps to open and fund your account, pick the fund in the photo below that most closely matches the year you plan to retire. Set it and forget it.


For example, I am 26 and don’t plan to retire for about 40 years. 2060 or 2055. The farther in the future the retirement year the more aggressive the fund will be. That is why in the 1-year average return column the highest returns are from the funds farther out, but remember that in years where the market does poorly those funds will do worse. The funds that are close to the current year such as the 2015 fund still go up and down in value but tend to not be such a wild ride. You can use this knowledge for other non-retirement items too. If I know I want to buy a house in 10 years. I could start putting my house savings into the 2025 or 2030 fund to let it grow, knowing there is still some risk of draw-downs.

Final Thoughts

The only people that get hurt on a roller coaster are the ones that jump off during the ride. Whether your investment beats or under performs the index, just stay consistent. You will almost always do better in the long term if you remain consistent instead of switching your investments every 5 years into what did the best over the last 5 years because what did the best over the last five years often won’t do the best over the next five. If you decide to do 50/50 BRK.B/VTI, all in on Target Retirement 20XX, all in on BRK.B, or all in some other managed fund it will not likely change your results drastically compared to the difference you will have if you are consistent with staying invested and saving more money overtime.

Still confused?

There are no dumb questions here. Ask away!


As always, I hate proof-reading. So, I apologize for all the errors you had to endure if you made it to this point in the page. If you find spelling, logical, or other types of errors please let me know.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this:
search previous next tag category expand menu location phone mail time cart zoom edit close