finance

Reviewed by Margaret James
Fact checked by Yarilet Perez

Forward P/E vs. Trailing P/E: An Overview

The forward P/E uses projected future earnings to calculate the price-to-earnings ratio. The trailing P/E, which is the standard form of a price-to-earnings ratio, is calculated using recent past earnings.

It can be helpful for investors to consider both calculations of the P/E ratio. If an investor has noted the forward P/E ratio from the previous year, the investor can check to see how accurate the previous year’s estimated P/E was based on the current P/E.

Forward P/E calculations are also helpful in comparing the likely future performance of similar companies in the same industry.

Key Takeaways

• Trailing P/E is calculated by dividing the current market value, or share price, by the earnings per share over the previous 12 months.
• The forward P/E ratio estimates a company’s likely earnings per share for the next 12 months.
• The primary difference between the two ratios is that the trailing P/E is based on actual performance statistics, while the forward P/E is based on performance estimates.

Trailing P/E

When analysts refer to the P/E ratio, they are usually referring to the trailing P/E. It is calculated by dividing the current market value, or share price, by the earnings per share over the previous 12 months.

This measure is considered the more reliable of the two metrics since it is calculated based on actual performance rather than expected future performance. However, it could prove a limited or faulty estimate since a company’s performance factors, costs, and profits change over time.

But the trailing P/E has its share of shortcomings, namely, a company’s past performance does not signal future behavior. The fact that the earnings per share number remains constant while the stock prices fluctuate is also a problem.

Important

If a news event drives the stock price significantly higher or lower, the trailing P/E will be accurate to the current state of the stock.

Stock analysts consider the trailing P/E as a type of price tag on earnings. This relative price tag can be used to look for bargains or to determine when a stock is too expensive. Some companies deserve a higher price tag because they’ve been around longer, have deeper economic moats, or a variety of other factors.

Some companies with a high trailing P/E ratio could be overpriced and deserve lower price tags for a variety of factors; others are underpriced, representing a great bargain. Trailing P/E helps analysts benchmark periods year-over-year for a more accurate and up-to-date measure of relative value.

Forward P/E

The forward P/E ratio estimates a company’s likely earnings per share for the next 12 months. The forward P/E ratio is favored by analysts who believe that investment decisions are better made based on estimates of a company’s future rather than past performance. Estimates used for the forward P/E ratio can come from either a company’s earnings release or from analysts.

Because forward P/E relies on estimated future earnings, it is subject to miscalculation and/or the bias of analysts. Also, companies might underestimate or misstate earnings to beat the consensus estimate P/E in the next quarterly earnings report.

Other companies may overstate the estimate and later update it, going into their next earnings announcement. Furthermore, external analysts may also provide estimates, which may diverge from the company’s estimates, creating confusion.

Forward P/E vs. Trailing P/E Example

Company XYZ has a stock price of $53 per share. Over the past year, the company has reported earnings per share (EPS) of $3.44. Its trailing P/E would be 15.4.

Trailing P/E = $53/$3.44 = 15.4

Company XYZ has been making investments in its infrastructure, which are expected to boost profits. As a result of these improvements, the company projects an EPS of $4.77 for the next 12 months. This forecast means the company has a forward P/E of 11.1.

Forward P/E = $53/$4.77 = 11.1

Investors and analysts comparing both the trailing P/E and the forward P/E will note that since the trailing P/E is higher than the forward P/E, it may indicate that earnings are expected to increase in the future. This would make the stock attractively priced based on future growth estimates.

It’s important to note that forward P/E is an estimate and could be optimistic, so investors should approach it with an air of caution. Comparing these two ratios alongside ratios with similar companies can help investors get a sense of overvalued or undervalued stocks to aid them in decision-making.

What Does P/E Tell You?

Price to earnings (P/E) is a financial metric that compares a company’s stock price to its earnings per share (EPS). It signifies how much investors are willing to pay (stock price) for a company’s earnings on a per-dollar basis at a specific point in time. Investors and analysts use P/E to determine whether a stock is overvalued or undervalued. A high P/E ratio signals that a stock is overvalued or that investors expect future growth. Conversely, a low P/E ratio signals that a stock is undervalued or that investors expect contraction in the future.

What Is a Good P/E Ratio?

A good P/E ratio will depend on many factors, such as the specific sector being analyzed, the current state of the economy, and the specific characteristics of the company being reviewed. As such, there isn’t a specific number or range that one can point to. It’s important to make an analysis in context and compare a company with its peers.

Generally, a high P/E ratio would indicate a company is overvalued (sell opportunity), and a low ratio would indicate a company is undervalued (buy opportunity), yet this could not be true, as a high P/E ratio might mean expected future growth for a company rather than overvaluation, for example.

What Does “Trailing” Mean in Finance?

In finance, “trailing” means a data point based on past performance. For example, “trailing 12 months” is commonly used and refers to a financial metric from the past 12 months as opposed to the previous month, quarter, or year. There is trailing 12 months (TTM) for net income, revenue, and various ratios. The goal is to smooth out the results of the past period being analyzed so investors can get a clear picture of a company’s results.

The Bottom Line

Both trailing P/E and forward P/E provide useful but different insights for investors. Trailing P/E/ is based on actual results, providing a picture of a company’s past performance and giving insight into a stock’s current value. It doesn’t consider future growth, however.

Forward P/E is just that, a valuation that takes into consideration projected future earnings. These earnings are estimates, so investors should be cautious when making decisions based on forward P/E.

A revitalized downtown and growing amenities make Danville more than just budget-friendly

Fact checked by Vikki Velasquez

Tucked away in southern Virginia near the North Carolina border, Danville is a mid-sized town of just over 42,000 people. It offers retirees a quieter, more relaxed lifestyle than larger cities without sacrificing essential amenities, largely thanks to more than $300 million invested in local revitalization over the past decade.

Once a hub of tobacco production, Danville has steadily reinvented itself. Its River District, now the town’s centerpiece, has seen a dramatic transformation, with historic warehouses repurposed into housing, breweries, restaurants, and even a science center. Let’s look at why this Virginia town is gaining attention as an affordable retirement gem.

Key Takeaways

• Danville offers a much lower cost of living than the national average, making it easier for retirees to live comfortably on a fixed income.
• The median home value is just over $110,000, about a quarter of the national median, and taxes, food costs, and housing expenses are significantly lower than across the U.S, 
• The town also provides ample access to medical services, with 160 health care establishments countywide and affordable local transportation.
• Recreation in Danville tends to be relaxed and community-focused, with entertainment options like riverfront hiking trails, art venues, and weekly farmers markets.

Cost of Living in Danville, Virginia

Even among the other top retirement destinations in the United States, Danville stands out as an exceptionally affordable choice. The median household income in the town is $42,778, barely more than half the national median of $80,610. That might seem like a drawback at first glance, but it’s actually a reflection of the area’s remarkably low cost of living.

Take housing, for example. The median home value in Danville is just $110,200, compared to $419,200 nationally. That offers potential savings of more than $300,000—and a discount of nearly 75%—for retirees interested in homebuying. Recurring costs are similarly reduced, with the typical monthly housing expense in Danville at $776 versus $1,338 for the average American.

Food costs also tend to be much lower than in the rest of the country. A two-person household in Danville spends around $586 a month, while the national monthly average is about $832. That equates to a discount of roughly 30%.

In addition to the low local costs, retired Danville residents can benefit from the fact that Virginia doesn’t tax Social Security income.

Note

The top four categories in the average retiree’s budget—housing, transportation, healthcare, and food—account for roughly 77% of total annual spending. Optimizing for these expenses is one of the best ways to keep your cost of living down.

Health Care and Accessibility

Reliable access to health care is an essential quality in a top retirement destination, and Danville more than delivers. The town is home to 160 medical facilities, including three hospitals. That number may seem modest compared to larger metropolitan areas, but it works out to a surprisingly dense 3.7 health care establishments per square mile.

Not only can Danville residents reach a medical provider without traveling too far, but local transportation is also more affordable than in many parts of the country. The typical monthly transportation cost in Danville is just $1,058, slightly below the national average of $1,098.

Tip

Public transit is also readily available, including a Mass Transit System that offers $1 bus rides from 6 a.m. to 6 p.m., Monday through Saturday. Rides are 50% off until noon for seniors, persons with disabilities, and Medicare cardholders.

For longer trips—whether for out-of-town health care or just to visit family—Raleigh-Durham International Airport is only 61 miles away from the city center. That makes interstate and international travel relatively convenient, without the higher cost of living that often comes with being too near a major airport.

Lifestyle and Recreational Activities

Affordability and access to health care are essential, but retirement should also be about enjoying your time. Danville offers a surprisingly well-rounded lifestyle for a relatively small city for those who would like a slower-paced, low-stress place to live.

For one, Danville supports a small but active arts community with 19 different art establishments, including everything from galleries to public performance spaces. For example, The Danville Museum of Fine Arts and History—housed in a Civil War-era mansion—anchors the city’s cultural scene with rotating exhibits, community events, and art education programs.

If you prefer to spend your leisure time outdoors, you can take advantage of Danville’s extensive trail system and riverside parks. The Dan River runs directly through the town, creating easy access to hiking, fishing, and kayaking opportunities. Thanks to the area’s relatively low Federal Emergency Management Agency (FEMA) climate risk rating, you can enjoy these spaces with less chance of natural disruptions.

Note

Danville’s top-rated Riverwalk Trail spans nearly 13 miles along the Dan River and connects several parks, historical sites, and downtown areas, making it a local favorite.

The Danville community may be quieter and more relaxed than in larger retirement destinations, but there are still plenty of ways to make connections. For example, a weekly farmers’ market runs from May to October, offering local foods and handmade goods. Meanwhile, summer brings free outdoor concerts through the Rhythms at the River series, bringing the townsfolk down to the River District waterfront.

The Bottom Line

Danville shines for its exceptional affordability, with the cost of living well below the national average in key categories like housing, food, and transportation. Its recent revitalization has only added to its appeal, turning its formerly empty downtown into a hub of local eateries, cultural venues, and green spaces.

If you’re looking to stretch your savings without sacrificing quality of life, Danville stands out as a smart and increasingly vibrant place to settle down.

Reviewed by David Kindness
Fact checked by Vikki Velasquez

Information technology (IT) plays a key role in the operations and success of most businesses.

For example, it makes it possible for accounting professionals and company managers to understand, organize, and master more effectively the intricacies of a wide range of financial data.

In particular, an accounting information system (AIS) provides these professionals with a tool that facilitates the collection, management, retrieval, and reporting of financial information that’s necessary for a business to meet its goals efficiently.

An AIS links inputs, procedures, and outputs for accounting purposes. AIS-generated reports can provide guidance for critical business decisions.

Key Takeaways

• Accounting information systems (AISs) facilitate the collection, management, and retrieval of information that’s necessary for a business to meet its goals efficiently.
• An AIS should include six critical components.
• These components are people, procedures and instructions, data, software, an IT infrastructure, and internal controls.
• They can create a formidable network of accounting assistance and help a business achieve success.

The 6 Components of an AIS

Armine Alajian, CPA, startup accountant, fractional CFO, tax consultant, and founder of the Alajian Group Inc. in Los Angeles and New York indicates that the key components of an AIS are:

1. People
2. Procedures and Instructions
3. Data
4. Software
5. Information Technology Infrastructure
6. Internal Controls.

These components serve three functions. They collect and store the necessary financial data, implement controls to accurately process it, and disseminate it to key personnel.

#1 People

Employees use the AIS within the business, while outside professionals who are enlisted for their services may also use it. These people can include key managers and accounting staff but several others as well.

“The ‘people’ component is first because it’s the most important,” Alajian says. “It encompasses everyone who’s using the system: accountants, auditors, managers, and analysts. There may be both internal users, such as employees, and external users, such as regulatory agencies.”

Collectively, they develop and manage the system.

#2 Procedures and Instructions

The second component concerns how information is collected, processed, stored, and then retrieved. It typically involves a series of steps.

“Processing is typically done by software,” according to Alajian. “Collection may include both manual and automated components. It must be accurate or else projections won’t be. Processing is what gives you usable information. Storing data gives companies the ability to analyze past performance, and it’s crucial for tax preparation.”

#3 Data

Data is all the information that goes into the AIS. This component likely includes:

• Payroll information
• Sales reports
• Inventory records
• Income statements, balance sheets, and cash flow statements
• Invoices
• Tax documents
• Purchases

Other data might be included depending on the business. Centralizing all this information in a single, accessible location can make it easier to get an accurate picture of a company’s financial health.

#4 Software

The software component refers to the computer programs that automate the collection, processing, and management of all this data.

AIS software reduces errors and supports the faster generation of financial information required by management.

“Commonly used options are QuickBooks, Freshbooks, or Xero, to name a few,” Alajian says. “Many companies have their own custom systems.”

#5 Information Technology Infrastructure

The fifth component is the information technology infrastructure that the software can’t function without.

“It’s basically the computers or hardware you’re using as well as the network to store and share information internally, which could be cloud-based or internal,” Alajian says.

IT infrastructure also includes mice, disk drives, printers, keyboards, and yes, even pens and paper. They’re all necessary to gather, organize, and distribute data.

#6 Internal Controls

Internal controls are the police of the AIS. They’re the security features that protect the data against the criminals of the technology world. They may be as simple as required passwords or as complex as biometric verification methods.

They stand against the viruses, hackers, and cyber-crooks that attempt to infiltrate computer-based networks.

Important

Internal controls protect more than businesses as a whole. They also shield employees whose Social Security numbers and other critical, personal data are included in the AIS.

Integration and Efficiency

Together, these six components can create a formidable network of assistance for a business that’s striving to effectively and efficiently meet its goals.

As Scottish poet Robert Burns once said, however, “The best-laid plans of mice and men often go awry.” AISs have the potential to go awry if they’re mishandled.

The American Institute of CPAs and the Canadian Institute of Chartered Accountants have pinpointed five specific factors that contribute to the reliability, sustainability, and success of any AIS:

• Security
• Confidentiality
• Privacy
• Processing integrity
• Availability

Only those with express permission to access an AIS should do so. Internal controls must be firmly in place to protect the data.

“One crucial idea in internal controls is segregation of duties. For example, the person who approves payments shouldn’t be the same person in charge of recording transactions,” Alajian says. “This kind of cross-checking helps to prevent unnoticed fraudulent transactions.”

Confidentiality works in tandem with privacy, and it specifically addresses how the collected data is used.

Processing integrity refers to the labeling and organization of the data. It dictates that data should be all-inclusive, properly labeled, and identified. It should be readily and promptly available to those with the authority to access it.

The Bottom Line

Thanks to hardware and software technologies, an AIS can provide businesses with a reliable and expeditious way to collect, manage, retrieve, and use information that’s vital to a company’s operations and overall success.

Each of the six components described above plays an integral role in a properly functioning AIS.

In addition, Alajian suggests a few questions to ask yourself if you’re considering fine-tuning or creating your own:

“Do you have a firewall? Is information password-protected and available only to select personnel? How simple is it for those personnel to access the raw data and the reports they need to analyze your company’s finances? Will an accountant or auditor have everything they need? And who’s checking to see that the raw data is complete, accurate, and reliable?”

Check these issues off your list as you implement your AIS. And don’t hesitate to get the helpful assistance of a qualified accounting professional, if necessary.

Buying a car involves certain financial and legal steps

Fact checked by Vikki Velasquez

Buying a car is a big decision, and you may have to live with your choice for years to come. Whether it’s a brand new luxury model or a beat-up junker, understanding the ins and outs of buying a car will help you get the best deal possible, look out for common pitfalls, and avoid buying a lemon.

Key Takeaways

• Figure out your budget before buying, including insurance and maintenance, and decide whether to pay in cash or with a loan.
• Choose a car that fits your needs (not your dreams), and always test-drive it before committing to buy.
• Private sellers can be cheaper, but dealerships and online platforms offer more convenience and protection.
• Don’t skip negotiating; knowing the car’s fair value and staying calm can save you a lot of money.
• Always double-check the paperwork to understand the costs, your financial responsibilities, and your legal rights.

There are a lot of factors to understand before buying a car—mileage, model, price, terms, and financing—that can be overwhelming if you aren’t familiar with them. Planning ahead and having a clear picture of what you want and what you can afford will help the process go smoother and leave you with a car that you and your finances are happy with.

Determine Your Budget and How You’ll Pay

The first step in buying a car is to set your budget. You need to know how much you can afford before starting the process. Overpaying can drain your savings, hurt your monthly expenses, or impair your financial profile.

Look at your monthly income and expenses and see what cost makes sense. Remember, the cost of a car isn’t just the price of the car itself; it’s also the insurance, gas, and maintenance costs. Experts recommend allocating 10% to 15% of your take-home pay for car expenditures. If you’re buying a used car, you may even want to include an additional buffer for increased maintenance costs.

After you decide how much you can spend on a car, figure out how you’ll pay. If you have enough savings to pay in cash, that’ll help avoid taking on debt and making monthly payments. It will also cost less money in the long run than an interest-bearing auto loan. Just make sure your car savings don’t take away from other priorities, such as college or an emergency fund.

Note

Using a credit card to pay for your car isn’t the best idea as any monthly balances carried over will incur the high fees that credit cards come with.

If you need to take out a car loan, you’ll want to look around for the best rates. Many car dealers offer in-house financing, but you can often find better rates from a bank or credit union. You might save a lot of money if you can get a pre-approval before you start car shopping.

Here’s where your credit score also comes into play. The better your score, the better your rate, and the less you’ll pay for your car. If you know you’ll need to borrow money, work on getting your credit score up before taking out a loan.

And if you are taking out a loan, having some cash to put forward as a down payment will help lower your monthly payments. As a rule of thumb, putting down 10% for used cars and 20% for new cars is a good idea.

Determine What Type of Car You Want

The car you want should ideally be the car you need. For example, if you live in a part of the world where it snows often, a four-wheel drive might be more prudent than a sports car. Looking for a car that serves your needs is the best starting point for your car search.

Will you primarily be commuting, or will you be transporting a group of kids to soccer practice? Will you have a large parking space in a lot or a tight squeeze in a small city? These are the types of questions to ask as you make your decision.

There are plenty of resources available to you that will help you pick the right car. Look at car websites, reviews, and YouTube videos to get a deeper familiarity with brands and models. Try to understand the pros and cons of each, the different features, and how all of that fits into your life.

Once you’ve settled on a few choices, take them for a test drive so you know how it feels in the specific car. Feeling how the car performs on the road can significantly impact your decision.

Important

Choosing between a new and used car is an important decision. While having a new car is great, it’s not always the best financial decision as new cars lose value as soon as they’re driven off the lot.

Decide Where You’ll Buy the Car

Where you buy your car can affect a lot of factors, such as price and quality. Here, we’ll break down what each means:

Private Seller: Buying from a private seller can get you a good price. They often need to sell and don’t have the same overhead costs to cover as dealerships do, so the price could be lower. However, a used car from a private seller comes with no warranty, and you’ll want to get the car inspected to ensure it’s in good repair. Additionally, make sure the paperwork is in good order.

Dealer: While buying from a dealer generally costs more, it’s usually the easiest and safest option. You’ll have a wide range of cars to choose from (some even with warranties), they’ll be able to offer financing, and they can handle all the paperwork. The higher cost may justify the peace of mind and simplicity of buying from a dealer. Note that dealers are required to include a Buyer’s Guide on each used car, which will provide additional information on the specific vehicle.

Online: Buying online can reduce the stress of having to buy in person, and there are plenty of options available to consumers now. Online marketplaces like CarMax (KMX) and Carvana (CVNA) allow users to select from a large assortment of cars at different prices and different types of financing. Even traditional car dealerships offer delivery options. It’s also in your right to receive a Buyer’s Guide when you buy online.

Out of State: Buying out of state can be a good option, especially if you’re looking for a rare car. It generally opens up a lot of selection but does come with points you need to consider, such as transportation (will you pick up the car and drive it back, or will you have it delivered?), abiding by state laws, different state taxes, and adhering to your state’s specific emission laws.

Negotiate the Price

Asking for a better price can be uncomfortable. Negotiating doesn’t come naturally to many people, but it’s definitely worth attempting, as it can save you hundreds or thousands of dollars.

When buying a car, know its fair market value. You can use many resources to determine this, such as online websites such as Kelley Blue Book or Edmunds. Ask the seller how they arrived at the price they’re offering.

You can negotiate from there. Be friendly and calm, but don’t give in to pressure, especially if you’re equipped with all the facts. You can walk away any time; plenty of cars are out there, and sometimes walking away might convince the seller to drop the price. This process also applies when trading your old car for a new one.

Finalize the Deal and Transfer Ownership

When buying a car, there’s plenty of paperwork to complete before you can drive home and take your friends and family for a spin. The paperwork covers all of your financial responsibilities and legal rights. Make sure you understand what you’re signing.

If you’re financing the car, understand the loan (fixed versus adjustable), the term, the rate, the monthly payments, and if there are any ramifications for paying off the car early. Go over all aspects of the contract, especially the breakdown of costs. Make sure there are no add-ons that you didn’t agree to that might increase the cost.

When buying from a private seller, you’ll need a bill of sale, the title signed over to you, and an odometer disclosure. When buying from a dealer, they’ll usually handle this.

Additional Tips

Get a Vehicle History Report

If you’re buying a used car, you must get a vehicle history report for yourself. You’ll want to know if the car has been in any accidents, if there’s been any type of damage, odometer rollbacks, or title issues. Knowing the car’s history will help prevent buying a car with problems or one that’ll cost you dearly down the road. Sites like Carfax or Autocheck can help you with this information. You can also check on the National Motor Vehicle Title Information System.

Get a Pre-Purchase Inspection

Also, when buying a used car, get an inspection from an independent mechanic. This will reveal any car issues that could cause problems for you later. This is usually not as much of a concern when buying from a dealership, but is essential when buying from a private seller or online.

The Bottom Line

It can be exciting to buy a new car, but it doesn’t have to be stressful if you prepare beforehand. Determining your budget, figuring out the type of car that fits your lifestyle, and knowing where and how to shop will make the process smoother and easier on your wallet.

Take your time, do the right research, ask the right questions, get the car inspected, and don’t be afraid to walk away if something is off. With some initial legwork, you’ll be able to find the car that suits you and your finances.

Reviewed by Thomas Brock
Fact checked by Vikki Velasquez

Specialization and economies of scale are two related economic concepts. Specialization involves focusing on a particular area of expertise to increase efficiency and productivity, which helps businesses achieve economies of scale. This relationship was explored by Adam Smith, who is considered to be the father of modern economics. Let’s take a look at these concepts and how they fit into Smith’s theory.

Key Takeaways

• Economies of scale and specialization are related concepts.
• Specialization involves focusing on one area of expertise, which increases efficiency and productivity.
• An increase in productivity can lead to economies of scale.
• Economies of scale can be achieved by training employees to focus on specific tasks.

Adam Smith’s Theory

Adam Smith laid out many economic theories, one of which was that the division of labor through specialization leads to growth. This idea was part of his book, “An Inquiry into the Nature and Causes of the Wealth of Nations.”

Smith believed that a company can hire more workers as it grows and divide them into certain roles. This means they end up with fewer responsibilities so they can improve and specialize in one core skill. Once a worker becomes more efficient, they become more productive and take up less time and fewer costs.

Defining Economies of Scale and Specialization

Economies of scale describes the cost advantage a company achieves with efficient production. Increasing production and lowering costs result in economies of scale because the costs are spread out over a larger number of goods. Producing additional goods doesn’t require a significant increase in costs. Reducing the cost of units per production is the main benefit of economies of scale.

In an economic context, specialization means focusing on one task rather than multiple tasks. It is a basic concept of learning. This allows workers to perfect that one task. When a person attempts a specific task for the first time, they may not be proficient at it. The more time they spend practicing or learning a skill, the better an individual gets at it. They also become efficient once they’ve mastered that task.

Note

Larger companies are more likely to achieve economies of scale than smaller companies because they can produce more goods and therefore can spread out costs over a larger number of goods.

Achieving Economies of Scale Through Specialization

As labor is divided amongst workers, workers can focus on a few or even one task. The more they focus on one task, the more efficient they become, which means that less time and less money is involved in producing a good. This means that the same time and money allow for the production of more goods.

When specialization occurs and results in economies of scale, a company can reduce the prices of its goods or services because it costs less to produce them. This provides a competitive advantage in the marketplace.

Example of Specialized Labor and Economies of Scale

An assembly line for a manufacturing company provides a useful example of specialization leading to economies of scale. Suppose a bicycle manufacturer has 10 workers each assembling 10 bicycles simultaneously. The time for one individual to assemble a bike could be considerable. In addition, the know-how of having to put multiple pieces together requires the need for more skills.

If the bicycle maker switches to an assembly line in its factory, the 10 workers can each focus on a specialized aspect of the assembly process. For example, one worker would add the brakes, the next worker would add the pedals, and so forth. Each worker would become proficient in their specific task and allow the bike to be assembled faster as it moves down the assembly line. This increases efficiency and allows for additional bicycles to be produced.

Because production increases, the fixed costs of production such as the building and tools used to assemble the bicycles are spread over an increasing number of products, thus achieving economies of scale.

Is Specialization the Only Way to Achieve Economies of Scale?

Economies of scale can be achieved through a variety of means other than specialization. Some other ways to achieve them include using technology to improve efficiency and the power of buying bulk, which leads to better costs. Larger companies can also consider seeking better terms on financing and better transportation networks to achieve economies of scale.

Why Are Economies of Scale Important?

Economies of scale are important because they give companies a competitive edge in the marketplace. Companies accomplish this by lowering their production costs when their output increase—all of which lead to higher profitability. This helps companies boost their bargaining power, keep competitors at bay, and increase their market share.

What Are Some of the Benefits of Specialization?

When companies specialize, they focus on producing one or a few related goods or services rather than producing multiple types. This benefits companies because they can increase their productivity, lower their costs, produce higher quality goods and services, and focus on growing their businesses.

The Bottom Line

Economic theory and the actual implementation of those theories have proven that as a company’s workforce specializes in specific skills, it leads to efficiency, which leads to more goods produced. As more goods are produced, the cost of producing them is spread out, leading to economies of scale, which is an important competitive advantage for any company.

Fact checked by Katharine Beer
Reviewed by Ebony Howard

The job market is competitive. You must communicate your skill set effectively to gain the best competitive advantage for landing the job. During the interview process, highlight as many strengths as possible. Here are seven things you should say in an interview.

Key Takeaways

• Highlight your strengths in a job interview.
• Research the company and know its products and services.
• Flexibility, energy, and optimism are all highly desirable qualities.
• Communicate your interest, experience, and goals effectively.

1. I Am Very Familiar With What Your Company Does

Letting a prospective employer know you are familiar with what a company does shows that you have a legitimate interest in the business and are not wasting their time. Do your homework before arriving for an interview. Check out the company website for information about products and services. Search for the latest transactions and pertinent business news.

2. I Am Flexible

Work environments are always changing. Prospective employers look for candidates who are open to change, adaptable, and who can multitask. Flexibility means you will do what is necessary to finish a task, including working additional hours or taking on additional job duties.

3. I Am Energetic and Have a Positive Attitude

Employers look for candidates with optimism and a “can-do” attitude. Attitudes are contagious and directly affect company morale. Let the optimist in you shine during the interview process. Be sure to always speak positively about past employers. Negative comments and sarcastic statements about past employers and co-workers are unnecessary.

4. I Have a Great Deal of Experience

Highlight any previous job duties that relate directly to your new job. If it is a management position, state every time you were responsible for supervising, training, and developing other employees. Discuss your motivational techniques and share specific examples of how you increased productivity. Feel free to list any training classes or seminars that you have attended.

5. I Am a Team Player

Companies are looking for team players, employees who are cooperative and get along well with other employees. Let your prospective employer know that you can flourish in group situations. Employers expect workers to be productive with limited supervision.

6. I Am Seeking to Become an Expert in My Field

Employers appreciate applicants increasing their knowledge base to make themselves the best employees possible. Stating that you aim to become an expert makes employers view you as an asset. You are a resource that other employees can learn from and you are invested in the long run.

7. I Am Highly Motivated

A motivated employee is a productive employee. Talk about how your level of motivation has led you to accomplish many things. If you are a meticulous worker, discuss your organizational skills and attention to detail. Companies are always looking for dependable employees whom they can count on.

Interview Question Examples

According to the Harvard Business Review, the following questions are common ones you should be prepared to answer at a job interview:

• Could you tell me about yourself and briefly describe your background?
• How did you hear about the job?
• What kind of work environment do you prefer?
• How do you deal with stress or pressured situations?
• Which do you prefer—working on your own or in a team?
• How do you stay organized when you’re juggling several projects?
• What are your salary expectations?
• Are you applying for other jobs?

What Is Illegal to Ask in a Job Interview?

It is illegal for a job interviewer to ask questions about a job applicant’s race, color, sex, age, national origin, or religion. These personal characteristics are all protected by law.

How Long Do Employers Take To Make an Offer After an Interview?

According to LinkedIn, interviewed candidates may wait 1-2 weeks or longer for an offer.

How Are Interviews Commonly Conducted?

Candidates may be invited to interview virtually, in person, one-on-one with one manager, or with a panel of company representatives who all have input and questions. Large companies may have candidates move through a multiple-interview process.

The Bottom Line

Remember that a job interview is an opportunity to sell yourself to a prospective employer. Use the right phrases to give you the best chance of securing your dream job.

Fact checked by Vikki Velasquez

You’ve got an extra room and could use the extra cash. Should you take on a roommate in retirement? With the median rental price of a two-bedroom unit in the U.S. costing $1,887 in February 2025, it might be tempting to consider.

If you do choose to open your home to a roommate, you won’t be alone in making that choice. People over 65 are the fastest-growing age group taking in roommates in their homes, according to SpareRoom, an online platform for people to find roommates.

Here are a few points to consider before taking the step of living with someone.

Key Takeaways

• If you would enjoy sharing your home and you have a spare room, renting a room may be a good way to make some extra money.
• You’ll want to vet a potential roommate carefully with a background check and references.
• Ask people that you know if they know of someone looking for a room to rent. Online ads are another way to find potential roommates.

Advantages of Having a Roommate

Having a roommate (or multiple roommates) can be an easy way to reduce your cost of living—for many people, housing is one of their largest monthly expenses.

“Even a few hundred dollars a month can have a big impact and that might allow you to retire a bit earlier or spend more on things you enjoy,” advises Justin Pritchard, a certified financial planner at Approach Financial.

But you will need to pay taxes on that money.

“The biggest thing to remember is that you have to report the rent as income. You can take deductions to reduce some or all of the income from being taxed, but no matter what, it adds a layer of complication to your tax return,” says Tara Unverzagt, president and senior financial planner at South Bay Financial Partners. “If you file yourself, you may need a professional to do it correctly.”

In addition to the money, having a roommate may be a good way to increase social interaction because many seniors report struggling with loneliness.

A 2023 University of Michigan survey found that more than one-third of adults ages 50 to 80 reported feeling isolated over the past year. Additionally, one-third said they had infrequent contact, which was defined as once a week or less, with people from outside their home in 2023.

Having a roommate could help some seniors stave of feelings of isolation and loneliness due to living alone.

Disadvantages of Having a Roommate

You won’t have as much privacy when you invite a roommate to live with you.

“Is privacy very important to you? If so, you probably want to avoid going the roommate route,” advises Eric Maldonado, a certified financial planner and owner of Aquila Wealth Advisors.

There may be disagreements with a roommate, something you don’t have to worry about if you live alone.

“In any shared living space, there may be conflicts regarding cleanliness and the way the space is utilized. And one of the biggest downsides is that if it doesn’t work out and you want to get the tenant out of the home, it may be very uncomfortable during the process, which could drag on for quite some time,” says Sebastian Frey, a broker associate at Compass Real Estate.

Finding a Roommate

Start by reaching out to people that you know and let them know you are looking for a roommate.

“If you have family or friends local you could try letting them know you are looking for a roommate. If you are a member at a church or social club you could let people know you are looking for a roommate and may even ask to post an announcement,” Maldonado says.

You may wish to place an online ad detailing the room you have for rent.  

“You can post your room on Craigslist or other local accommodations search websites. If you are looking for someone of a certain age or stage of life, there are probably civic clubs or forums you can post in online that cater to those age groups,” Maldonado advises.

Note

If it’s an option, consider relocating to a more affordable area; you might be able to live solo without needing a roommate.

Vetting a Roommate

You’ll want to check out the background of a potential roommate to make sure they are a good match for you.

“You would want to have a very good vetting process. Patience and taking your time [are] key here. Do a background check, follow up with references, and have a couple conversations first,” Maldonado says.

Discuss with a potential roommate your schedule and what you expect from someone living in your home.

“Make sure you clearly outline your living arrangements, your schedule, and your expectations before committing to renting out a room. Take the time to choose a roommate who you think you’ll get along well with,” Hutchinson says.

Preparing for a Roommate

You’ll need to get the room you are renting out ready for a roommate and write up a rental agreement.

“There’s some administrative setup you’ll need to do, including creating a written agreement, preparing your room, and making sure you’ve read up on the state and local laws and tax rules. But the financial reward is well worth your time,” Hutchinson says.

Not sure how much to charge? SpareRoom provides a list of average rents in metro areas around the United States.

“Take a look at other room listings in your area or average rents to see how much you could charge for your room,” Hutchinson advises.

The Bottom Line

If you like company and have a spare room in your home, you may be able to supplement your retirement income by renting a room. Do a background check on all potential renters and ask for references.

Search for renters online, inquire with friends and family, and ask around at social clubs. You’re looking for someone who will be a good fit for your home. Don’t rush the process. Make sure to clean and prep the room and prepare a rental agreement. Once you find the right person, the room is theirs and the monthly rent check is yours.

A surprising mix of big-city amenities, outdoor adventure, and local community awaits

Fact checked by Vikki Velasquez

Located along the western edge of Lake Erie in Ohio, Toledo is a vibrant city where retirees can enjoy a balance of urban benefits and affordable living. The largest city in Lucas County—home to nearly 430,000 people—is also big enough to offer modern conveniences but small enough to maintain a down-to-earth atmosphere.

Known as the Glass City for its glass manufacturing roots, Toledo offers much more than you might expect. From its nationally recognized art museum and historic neighborhoods to a thriving Metroparks system and seasonal festivals, the city also delivers a unique blend of culture, nature, and community. Let’s explore what makes it a top-ranked place to retire.

Key Takeaways

• Toledo is a hidden gem for retirees looking to stretch their money, offering a blend of affordability, amenities, and outdoor adventure.
• Toledo’s cost of living is well below the American national average, helping you stretch your retirement funds further.
• With nearly 900 healthcare establishments in the county, including 81 hospitals, Toledo provides retirees excellent access to medical care.
• Toledo is well-connected and easy to navigate thanks to its major highways, affordable local transportation, and proximity to an international airport.
• A rich arts scene, scenic outdoor spaces, and frequent community events offer a fulfilling lifestyle for Toledo retirees.

Cost of Living in Toledo, Ohio

With many retirees looking to stretch a fixed income, affordability is typically one of the highest priorities when choosing a retirement destination. Toledo has a relatively low cost of living, making it an attractive choice. Retired residents can often maintain an enjoyable lifestyle without financial strain.

According to the most recent data, the median household income in Lucas County is $60,095, more than 25% lower than the national median of $80,610. Monthly costs are proportionately lower, too, including two of the most significant expenses for the average retired household: housing and food.

The median home value is just $155,200, a full $264,000 cheaper than the national median of $419,200. Through a recurring expenses lens, that translates to median monthly housing costs of $953 in Lucas County versus $1,338 for the typical American.

Similarly, a local two-person household’s average monthly food bill is just $600. That’s $232 below the national average of $832, which works out to a discount of roughly 28%. Despite the low costs, Toledo has a vibrant culinary scene, offering everything from local farm-to-table spots to international restaurants that reflect the city’s cultural diversity.

Note

Housing and food expenses constitute roughly 36% and 13% of the average retiree’s annual spending, so saving money in these areas can free up significant room in your budget.

Health Care and Accessibility

Since retirees often need more regular medical services than younger individuals, easy access to health care is another marker of an attractive retirement destination. That’s another area where Toledo stands out, providing a rare combination of plentiful medical establishments, affordable transportation, and proximity to a major airport.

There are a whopping 887 health care facilities in Lucas County, including 81 different hospitals. Since the county only has 339.7 square miles of land area, that works out to roughly 2.6 healthcare establishments per square mile, ensuring that retirees never need to travel too far for medical assistance.

Getting around the area is also relatively inexpensive. Despite being a major metropolitan area, typical monthly transportation costs in Lucas County are $1,132, within $50 of the national average of $1,098. There are plenty of transit options, including the Toledo Area Regional Transit Authority (TARTA), a curb-to-curb Call-a-Ride service, and a healthy Uber and Lyft presence.

Tip

If you ever need to travel long-distance, the Detroit Metropolitan Airport is only 48 miles from the center of Lucas County. That means residents are less than an hour’s drive down Interstate 75 from a major airport with domestic and international connections.

Lifestyle and Recreational Activities

Practical concerns like affordability and access to health care are critical when choosing a retirement destination, but they shouldn’t be the only factors you consider. It’s just as important to pick somewhere you can enjoy your day-to-day life. Whatever you like to do for fun, Toledo has a lot to offer, including a healthy mix of indoor and outdoor opportunities for entertainment and social connection.

For those with creative sensibilities, the city is home to 170 art establishments, including the Toledo Museum of Art, which offers a collection of world-class exhibitions and free general admission. History buffs can also explore the neighboring Glass Studio to explore the city’s rich legacy of glassmaking or walk through the historic Old West End.

Note

The National Register of Historic Places named Old West End a historic district in 1973 for being the largest collection of late Victorian and Edwardian architecture in the United States.

If you prefer outdoor adventures, the Maumee River flows through the city from Lake Erie, which borders Toledo’s northeastern edge. Combined with the Metroparks Toledo system—boasting 19 different parks—there are ample opportunities for activities like hiking, camping, boating, and birding.

Whatever you’re interested in, Toledo also offers plenty of chances to connect with the community through its many public events. The beloved Toledo Farmers’ Market runs every Saturday year-round, featuring local cultivators and craftspeople. Yearly festivals, like the award-winning Black Swamp Arts Festival—Ohio’s largest free live music festival—bring even more people together and showcase the area’s spirit.

The Bottom Line

Toledo, Ohio, is an attractive retirement destination for those who want to retain the benefits of an urban lifestyle without sacrificing affordability. Its proximity to Lake Erie means there’s no shortage of natural beauty or outdoor adventure, while frequent local events foster socialization and a strong sense of community. All these factors combined make Toledo a compelling, well-rounded place to enjoy your golden years.

Reviewed by Charlene Rhinehart
Fact checked by Vikki Velasquez

Exchange-traded funds (ETFs) have become a staple in many investors’ portfolios thanks to their low costs, tax efficiency, and broad diversification. But are they a smart addition to a retirement account like a 401(k)? The answer depends on how the plan is structured, your goals, and the flexibility of employer-sponsored plans.

It’s also important to keep in mind that although ETFs have gained traction in individual retirement accounts (IRAs) and brokerage accounts, their integration into 401(k)s has been slower and more complex. Here’s what to know before relying on ETFs in a retirement savings strategy.

Key Takeaways

• ETFs can be a low-cost, diversified option for retirement investors, but their advantages vary based on 401(k) plan structure.
• While ETFs are typically more tax-efficient than mutual funds, this benefit is less relevant in tax-deferred accounts like 401(k)s.
• Some 401(k) plans lack the infrastructure to integrate ETFs efficiently, thereby limiting their accessibility.
• The adoption of ETFs in 401(k)s is growing, particularly through self-directed brokerage windows and ETF-based target-date funds.

Understanding ETFs

Exchange-traded funds (ETFs) are pooled investment vehicles or baskets of stocks that trade on exchanges just like individual stocks. They often aim to track the performance of an index, sector, or asset class and can include a wide range of securities—from domestic and international equities to commodities, currencies, and bonds.

Types of ETFs

There are over 12,000 ETFs on the market, and they vary by type. Here are some of the most common:

• Equity ETFs: Track stock indexes like the S&P 500 and Dow Jones Industrial Average (these are also referred to as index ETFs) or sectors such as technology or healthcare
• Bond ETFs: Give investors exposure to government, corporate, or municipal bonds
• Commodity ETFs: Invest in physical assets like precious metals, gold, oil, or agricultural products
• Currency ETFs: Track foreign exchange movements
• Cryptocurrency ETFs: Invest in digital assets like Bitcoin and Ethereum

This variety allows investors to build highly diversified portfolios tailored to their risk tolerance and investment horizon.

Management Styles

ETFs are often passively managed and meant to track a benchmark index. However, some are actively managed and attempt to outperform the market.

“When evaluating ETFs for a 401(k), it’s important to consider cost, liquidity, and administrative ease,” says Christopher Stroup, founder of California-based Silicon Beach Financial. “ETFs often have lower expense ratios than mutual funds, but they trade like stocks, which can complicate implementation in a retirement plan.”

Advantages of Including ETFs in 401(k) Plans

Cost Efficiency

One of the key selling points of ETFs is their low cost. According to data from the Investment Company Institute, the average expense ratio for actively managed equity ETFs is significantly lower than that of comparable mutual funds. “ETFs typically have lower expense ratios than mutual funds, which helps reduce long-term costs,” says Stroup.

These lower fees can be particularly important for retirement planning as they can have a compounding effect over time, especially in a tax-deferred environment where savings remain invested for decades.

Diverse Investment Options

ETFs give 401(k) investors access to a broad range of asset classes and strategies, from U.S. large caps to emerging markets and niche sectors—all of which can help ensure strong portfolio diversification. In some cases, ETFs are also used as building blocks to create custom portfolios or in ETF-based target-date funds, which automatically adjust asset allocations as retirement approaches.

Disadvantages of Including ETFs in 401(k) Plans

Intraday Trading Concerns

Unlike mutual funds, which are priced at the end of the trading day, ETFs can be bought and sold throughout the day at market prices. While this affords investors some flexibility, it can be a double-edged sword for retirement savers, says Stroup. “While ETFs can be bought and sold throughout the day, long-term investors don’t need this flexibility. It may also encourage unnecessary trading,” he says.

In the same vein, it’s important to remember that 401(k) plans are designed for long-term, automated investing—and frequent trading is generally discouraged. By design, the intraday nature of ETFs may conflict with the generally hands-off philosophy of retirement planning.

Tax Efficiency in Tax-Deferred Accounts

ETFs are often lauded for their tax efficiency—particularly their ability to avoid capital gains distributions through in-kind redemptions. But this advantage matters less in a 401(k), where investments grow tax deferred.

“ETFs use an in-kind redemption process, minimizing capital gains distributions,” Stroup says. “401(k) participants should know that this matters more in taxable accounts.”

In other words, the tax benefits of ETFs are largely neutralized inside a 401(k), where taxes aren’t due until distributions are made in retirement.

Plan Integration

One of the biggest hurdles to wider ETF use in 401(k)s is operational. Many 401(k) providers still lack the infrastructure to support ETFs as seamlessly as mutual funds, limiting their availability in standard plan menus.

“Some 401(k) providers don’t support ETFs efficiently, which makes them less accessible than traditional mutual funds,” says Stroup. Mutual funds, by contrast, are deeply embedded in the 401(k) ecosystem. They allow for easy automation of contributions, dollar-cost averaging, and rebalancing—features that aren’t always available with ETFs.

Pros

• Lower expense ratios than mutual funds

• Can help ensure strong portfolio diversification

Cons

• May encourage unnecessary trading and conflict with the hands-off philosophy of retirement planning

• Tax benefits of ETFs are largely neutralized inside a 401(k)

• Providers lack the infrastructure to support ETFs as seamlessly as mutual funds

Current Trends and Adoption

ETF Adoption in 401(k) Plans

Although mutual funds still dominate the 401(k) landscape, ETFs are beginning to gain ground—particularly in plans that offer greater investment flexibility. “More 401(k) plans are starting to offer ETFs, especially in self-directed brokerage accounts where participants can select ETFs alongside traditional funds,” says Stroup.

These brokerage windows, offered by major providers like Fidelity and Schwab, allow retirement savers to build more customized portfolios that include ETFs targeting specific sectors, regions, or strategies. Additionally, some plan sponsors are exploring ways to reduce fees by incorporating ETFs into their core investment menus, Stroup says.

Innovative 401(k) Plans Using ETFs

Some forward-looking employers are taking a more progressive approach by integrating ETFs directly into their 401(k) offerings. One notable trend is the development of ETF-based target-date funds—portfolios that automatically shift asset allocations as participants near retirement, using low-cost ETFs instead of mutual funds, Stroup says.

These ETF-based solutions aim to deliver the same hands-off investing experience as traditional target-date funds but at a potentially lower cost. They’re also being used by robo-advisors and managed account platforms embedded within 401(k) plans.

The Bottom Line

ETFs offer compelling benefits for retirement planning (and investing)—low costs, diversification, and transparency—but they aren’t always a perfect fit for 401(k) plans. Their intraday tradability and tax efficiency matter less in a retirement account, and plan integration remains a key barrier.

Still, with the rise of adoption—including through self-directed brokerage windows and ETF-based target-date funds—more retirement savers will likely gain access to ETFs over time. As always, the best option depends on your specific plan and your long-term goals.

Here are five reasons to leave your 401(k) with your previous employer

Reviewed by Anthony Battle
Fact checked by Jiwon Ma

You’ve left your job. What should you do with the 401(k) plan you’ve faithfully contributed to for years? Conventional wisdom says to roll it over into an individual retirement account (IRA). In many cases, that is the best course of action. But there are times when a rollover is not your best option.

Let’s take a look at five of those situations and the rationale for keeping your 401(k)—or, if you’re a public or nonprofit employee, your 403(b) or 457 plan—in place at your now-former employer’s plan.

Key Takeaways

• Leaving your 401(k) account with your employer can save you fees because the company can buy funds at institutional pricing rates.
• If you own appreciated company stock in your 401(k), transferring the stock to a brokerage account instead of an IRA can save on taxes.
• Not rolling over your 401(k) can help with legal protection in bankruptcy and provide access to your money at an earlier age.
• Company 401(k) plans have access to stable value funds.

1. Greater Buying Power

Company 401(k)s can purchase funds at institutional pricing rates, which is not usually true for IRAs. Think of it as a corporate discount. Because they’re investing for many workers, “most 401(k), 403(b), and 457 plans have significant buying power—much more than the individual [retirement account],” says Wayne Bogosian, ex-president of the PFE Group and co-author of The Complete Idiot’s Guide to 401(k) Plans. That can save you significant money on fees, leaving more to appreciate in your account.

2. Tax Savings

If your 401(k) plan includes company stock that has greatly appreciated, you could save a lot on taxes if you transfer that stock to a regular brokerage account. You will have to pay taxes on the shares taken out of your 401(k) at your current income tax bracket‘s rate. However, the tax is based on your original purchase price. You won’t pay for any gain on that stock until you actually sell it—and then you’ll pay at the capital gains tax rate, which is lower than the income tax rate. This is known as net unrealized appreciation (NUA).

“NUA is a tremendous opportunity for individuals with appreciated company stock in their 401(k),” says Jonathan Swanburg, CFP®, President of TSA Wealth Management in Houston, Texas.

“If, on the other hand, a plan participant holds depreciated company stock that she plans to hold until the price goes higher, she should consider selling her shares and repurchasing them shortly thereafter,” he adds. “Inside a 401(k), the wash-sale rule doesn’t apply, and this resets the cost basis, increasing the potential for taking advantage of the NUA down the road.”

Let’s suppose, for example, the company stock was bought for $10,000 and is currently worth $50,000 on the market. Your tax bill for transferring the stock to the brokerage firm will be based on the $10,000 purchase price. You won’t be taxed on any of the gains until you sell it. Because the stock is being sold in a brokerage account, when you do sell it, it will be taxed at the more favorable capital gains tax rate, versus the ordinary income tax rate.

In contrast, if you rolled over that stock into an IRA, it would eventually be taxed at your income tax rate when you need to sell the stock to start taking your required minimum distributions (RMDs) from the IRA. RMDs begin at age 73 “if you reach age 72 after Dec. 31, 2022,” according to the Internal Revenue Service (IRS).

There are, however, reasons to be cautious. Below are two:

• Make sure the holdings in your 401(k) are actual stock shares.
• Make sure the transfer of these holdings doesn’t put such a sizable bump in your income that you get pushed into a higher tax bracket, which would mean you’d end up owing the IRS much more than you otherwise would come next April.

Important

Check with your company before deciding what to do with your 401(k), since you may not have the same access, fund-allocation privileges, or fees once you leave your job.

3. Legal Protection

Money held in a 401(k) is protected by federal law from nearly all types of creditor judgments, other than IRS tax liens and some spousal or child support orders. IRAs are less protected.

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 does protect up to $1 million in traditional or Roth IRA assets against bankruptcy. But protection against other types of judgments varies by state.

If you are concerned about potential judgments, creditors, or collections, keeping your 401(k) funds in place might afford the most safety.

4. Early Retirement Benefits

“One of the most important reasons not to roll over your 401(k) to an IRA is to have access to your funds before age 59½,” says Marguerita Cheng, CFP®, CEO of Blue Ocean Global Wealth in Louisville, Kentucky. “They can be accessed as early as age 55, versus having to pay a 10% early withdrawal penalty in an IRA.”

In fact, after you leave, you may be able to withdraw money from your 401(k) multiple times each year. (The employer sets the rules about how many times people can withdraw funds.) You lose this privilege once you roll the 401(k) into an IRA, and you’ll have to wait until age 59½ to access your money without penalty.

However, there’s an important exception to the early distribution penalty as part of IRS rule 72(t), which allows you to make withdrawals under the substantially equal periodic payment (SEPP) program.

If you’re still working for your employer, SEPP withdrawals are not permitted from the qualified retirement plan. However, if you’re separated from the company, you can qualify for this exception. The funds can also come from an IRA under SEPP at any time. The distributions are formulated as a series of substantially equal periodic payments over your life expectancy using IRS tables.

However, once you start SEPP payments, you must continue for a minimum of five years or until you reach the age of 59½, whichever comes later. If you fail to meet this requirement, the 10% penalty will be levied, and you may owe penalties from prior tax years if you had taken distributions.

5. Stable Value Funds

Company 401(k) plans have access to a special type of fund called a stable value fund. Not available in the individual market, these funds are similar to money market funds, but they typically offer better interest rates. If you’d like to take advantage of these risk-averse vehicles, and your 401(k) offers them as an option, then seriously consider sticking to your current plan.

Can You Roll a 401(k) into an IRA Without Penalty?

Yes, you can roll a traditional 401(k) into a traditional IRA without a penalty and without any tax consequences. If you roll over a traditional 401(k) into a Roth IRA, there will be tax consequences. This is because a traditional 401(k) is funded with pre-tax dollars while a Roth IRA is funded with after-tax dollars.

What Are the Disadvantages of Rolling Over a 401(k) into an IRA?

Some of the disadvantages of rolling over a 401(k) into an IRA include no loan options, a decrease in creditor protection, possibly higher fees, and the loss of a possible earlier withdrawal without penalty.

How Much Does It Cost to Roll Over a 401(k) into an IRA?

There is typically no fee or charge associated with rolling over a 401(k) to an IRA. It is possible that account fees in the IRA may be higher than the fees in the 401(k) account.

The Bottom Line

When you part ways with your company, deciding what to do with your retirement savings can be daunting. Rolling over a 401(k) might work for most people, but there are reasons why leaving the money in the company fund could work better.

Do check your company’s rules, though: Most employers require you to maintain a minimum sum in your 401(k) if you want to leave the account in place after your employment ends, and there may also be differences in your access, fund-allocation privileges, and fees.

There’s one other option to investigate if you want to keep your money in a 401(k) after you leave your old job for a new one: rolling over the money in your previous job’s plan into the 401(k) at your new company, if that’s permitted. This is an excellent option for older employees who want to protect that money from being subject to required minimum distributions (RMDs), because you don’t have to take RMDs from your 401(k) at the company where you currently work. Just make sure that the new plan’s fees aren’t worse and that the investment options are comparable.