Answers · 401(k) Rollover

How much will $20,000 in 401k be worth in 20 years?

Nobody can tell you, and a confident single number is usually a sales tool rather than an answer. With no new money added, the arithmetic runs about 64,100 at 6 percent a year and about 77,400 at 7 percent. The gap between those is the assumption, not the money. You cannot control the return. You can control what the account charges you.

Any specific number you are shown is arithmetic, not a forecast.

The honest answer is that nobody knows. Not the plan provider, not the calculator on somebody's website, and not us. What anyone can do is arithmetic, and arithmetic needs an assumption about the rate. Change the assumption and the answer moves by tens of thousands of dollars.

That is not a dodge. It is the most useful thing to understand before you look at any projection. The number is only as good as the rate someone typed into the box, and the rate is a guess. When a projection is being used to sell you something, the rate in the box tends to be a flattering one.

So there are two better questions to ask about any projection. What assumption is this built on, and what is coming out of it every year. To be clear about who is talking here: opfinances.com is a licensed insurance agency, not a financial advisor and not a fiduciary.

Here is the actual arithmetic, with no new money added.

Assume 20,000 sits in an old plan and you never add another dollar to it. Over 20 years, the rate you assume decides everything.

At 4 percent a year it becomes about 43,800. At 6 percent, about 64,100. At 7 percent, about 77,400. At 8 percent, about 93,200.

Look at the spread rather than any one line. Four percentage points of assumption is the difference between 43,800 and 93,200. Anyone who hands you a single figure without the assumption printed next to it has told you almost nothing.

There is a sanity check you can do in your head. Divide 72 by the rate and you get roughly the number of years it takes money to double. At 7 percent that is about 10 years, so 20 years is about two doublings, which lands near 80,000. The rule of 72 is rough, but it is close enough to catch a number that is being oversold.

The average return is not the return you get.

Projections use a smooth, steady rate. Markets do not deliver one. That gap is not a technicality, and it does not work in your favor.

Take two years. The first is up 50 percent and the second is down 50 percent. The average of those two numbers is zero, so it sounds like you broke even. You did not. A dollar grows to 1.50, then loses half, and you are left holding 75 cents. Down 25 percent, while the average says nothing happened.

Swings cost you something even when the average looks fine. So a projection built on a straight line is showing you the friendliest version of a bumpy road. Over 20 years, the order the good and bad years arrive in changes where you end up, and no projection knows that order in advance.

The fee is the part you can actually control.

You do not control the market. You do control what the account charges you, and across 20 years that is a bigger lever than most people expect.

Same 20,000, same 20 years. At 7 percent you land near 77,400. Now take one percentage point a year in costs, so you are compounding at 6 instead of 7, and you land near 64,100. That single point cost about 13,300, which is roughly a sixth of the result. Half a point still costs about 6,900.

Nothing was withdrawn and nothing went wrong. The fee took its slice each year, and the slices compounded too. So it is worth knowing what your account costs you as an actual number, because that is the one input in the whole calculation you get a say over.

Old workplace plans are a common place for this to hide. Some are genuinely excellent and cheaper than anything you could buy on your own, because a large employer negotiated the pricing. Others carry record keeping charges and an expensive fund menu you never picked. The only way to know which one you are sitting in is to look at the statement and add it up.

Money in a plan you left behind is the most forgotten money there is.

Twenty thousand dollars in a former employer's plan tends to go quiet. Statements go to an address you moved out of, the login stops working after the provider changes, and the account is effectively managed by nobody for years.

You generally have four options. Leave it where it is, move it into a new employer's plan, move it into an IRA, or cash it out. Cashing it out is the expensive one, because tax and any penalty come off the top and the compounding stops permanently.

There is no deadline on a direct transfer from one plan to another, so this is not urgent in the way a salesperson might suggest. It is worth doing deliberately rather than never doing it at all. If somebody is pressing you to decide this week, that pressure is about their calendar and not your money.

The comparison that matters is a boring one. What does the old plan cost you each year, what would the new home cost, and what does each one let you own. Start there, before anyone shows you a projection with a big number at the end of it.

Related

How long does it take to double money in a 401(k)?

Divide 72 by the annual rate for a rough answer. At 6 percent that is about 12 years, at 7 percent about 10, at 8 percent about 9. It is an approximation and it assumes a steady rate you will not actually get, but it is accurate enough to sanity check any projection somebody puts in front of you.

What rate of return should I assume for a 401(k)?

There is no correct number. Long run stock market averages get quoted somewhere between 7 and 10 percent before inflation, and a mix holding bonds would assume less. The useful habit is to make sure the assumption is written down where you can see it, then look at the same projection two points lower before you decide anything on the strength of it.

Can my old employer move or cash out my 401(k) without asking me?

For small balances, within limits set by law, yes. Plans are permitted to automatically roll balances up to 7,000 into an IRA opened in your name, and very small balances can be sent out as a check. At 20,000 you are above those thresholds, so the money stays put until you act. Plan rules vary, so read yours rather than assuming.

Does 20,000 growing to 64,000 mean I really made money?

Less than the headline suggests. Prices rise over the same 20 years, so 64,000 then does not buy what 64,000 buys today. At 3 percent inflation it would take roughly 1.80 dollars in the future to buy what one dollar buys now. The growth is real, it is just smaller in purchasing power than the number on the statement looks.

Where this fits.

This question sits inside a bigger one. 401(k) Rollover walks through the whole decision rather than this one piece of it.

On Point Finances is a licensed insurance agency, not a tax, legal, or investment adviser. This page is general education, not a recommendation, and reading it does not create a client relationship.

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