Research summary

The “sticky” IRA cash trap

July 23, 2024

IRAs are typically funded with cash, whether through direct contributions or through rollovers, and stay in cash or cash equivalents absent a reallocation by the account holder. For investors under age 55, we estimate that investing in a target-date fund at rollover could lead to at least $130,000 in incremental retirement wealth at age 65.1 Accordingly, eliminating the cash drag in IRAs could enable millions of Americans to live more comfortably in retirement, have greater protection against longevity risk, and/or retire earlier.

How sticky is cash in IRAs?

“Although IRAs are designed to support long-term retirement wealth accumulation, a substantial proportion of IRA assets enter as and remain in cash-like instruments for months or even years,” said Andy Reed, head of investor behavior research at Vanguard. “Unfortunately, cash typically offers modest returns that are outpaced by inflation, undermining retirement readiness.”

To assess just how sticky cash is in IRAs, we looked at a sample of rollover and direct contributions made by investors into Vanguard IRA accounts in 2022. Even after 12 months:

  • 28% of investors in the sample who conducted rollovers still had their assets in cash or cash equivalents.
  • 55% of investors in the sample who made direct contributions still had their assets in cash or cash equivalents.

Moreover, as the figure below illustrates, rollovers that are still in cash after the first year tend to remain that way for at least seven years. Just how sticky cash can be varies by age: Younger investors (ages 20–29) are least likely to move out of cash over the long run, which is especially unfortunate since investors in that age range stand to benefit the most from investment returns compounding over time. 

IRA cash from rollovers demonstrates stickiness over time, especially for younger investors

A line chart showing the percentage of clients who did not make a subsequent trade for up to seven years after rolling over funds into a Vanguard individual retirement account (IRA). The percentage of clients who did not make a trade decreases over time for all age groups. For the youngest investors, ages 20–29, the percentage drops from 99% to 73% after one year and then slowly declines to 53% after seven years. For the oldest investors, age 60 and older, the number drops from 98% to 33% by the end of the first year and then slowly declines to 15% after seven years. For investors ages 30–39, 40–49, and 50–59, the percentages follow similar patterns in proportion to their age group, with older age groups showing faster declines than younger ones.

Notes: We considered rollovers in 2015 that were at least $1,000 and entered the account in cash. We also restricted our analysis to clients who had a positive IRA balance at the end of 2022. The resulting sample size represented roughly 68,000 rollovers. We tracked subsequent trading activity in the IRA for seven years following the rollover and plotted, at each point during this seven-year period, the share of clients who had not yet conducted a single trade in the IRA.

Source: Vanguard analysis of rollovers to Vanguard IRAs initiated in 2015 and tracked until year-end 2022.

Giving IRA investors the best chance for investment success

“The cash drag in IRAs is a widespread, enduring, and costly problem—but it is not insurmountable,” said Reed. “Our analysis indicates that putting investors’ rollover assets into a broadly diversified investment like a target-date fund by default instead of leaving them in cash could generate over $170 billion in additional retirement wealth for American workers each year from rollovers alone.”2

The simple act of investing cash sitting in IRAs could thus produce compound benefits well into the future, putting millions of Americans on a better path to retirement.

1 See page 10 of our policy paper, Improving retirement outcomes by default: The case for an IRA QDIA, for an explanation of the calculations and assumptions used.

2 See page 11 of Improving retirement outcomes by default: The case for an IRA QDIA for an explanation of the calculations and assumptions used.

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Notes:

All investing is subject to risk, including the possible loss of the money you invest.

Diversification does not ensure a profit or protect against a loss.

There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.

Investments in target-date funds are subject to the risks of their underlying funds. The year in the fund name refers to the approximate year (the target date) when an investor in the fund would retire and leave the work force. The fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. An investment in target-date funds is not guaranteed at any time, including on or after the target date.

CFA® is a registered trademark owned by CFA Institute.  

Contributors

Andy Reed, Ph.D.
Andy Reed, Ph.D.
Fiona Greig, Ph.D.
Fiona Greig, Ph.D.
Aaron Goodman, Ph.D.

Aaron Goodman, Ph.D.

Ariana Abousaeedi, CFA

Ariana Abousaeedi, CFA

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