Itsme

Retirement blunder: Raiding the 401(k)

Survey: many workers cash out plans when changing jobs, incurring penalties and losing savings.

July 25, 2005: 11:16 AM EDT
By David Ellis, CNN/Money staff writer

NEW YORK (CNN/Money) - Almost half of workers leaving their jobs are raiding their 401(k) accounts for cash when changing jobs instead of holding on to their retirement savings, according to a recent study.

The survey, conducted by Hewitt Associates, a global human resources services firm, revealed that 45 percent of 200,000 individuals participating in 401(k) plans, opted to cash out of the retirement plan after leaving their job.

"Our findings show that too many workers are not looking at their 401(k) savings as long-term in nature, but are instead using termination of employment as an opportunity to spend this money," said Lori Lucas, director of participant research at Hewitt Associates, said in a statement.

32 percent of those individuals surveyed kept their retirement savings in their current employer's 401(k) plan and the remaining 23 percent rolled their money over to an IRA or another retirement plan.

Besides forsaking a key source of retirement savings, individuals who cash out of their 401(k) before they are 59 1/2, are typically forced to pay taxes on that balance plus an additional 10 percent penalty.

The study also found that the age of the worker and the balance of the account were important factors for those employees who decided to cash out their savings plans.

About two thirds of employees age 20 to 29 cashed out of their 401(k) plan after changing jobs, while older workers tended to hold onto their savings.

72.5 percent of those employees with account balances under $10,000 raided their 401(k) savings, while cash out rates were significantly lower for those individuals with balances larger than $10,000.

Merlin

Either leave it in the plan or roll it over. Cashing it out is a really bad idea and kills your long term wealth building.

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smeakim

You didn't have access to the money before, why use it when you leave a job? Its one thing if you get laid off and need the money or the amount is very little like 500 or so, but come on. No wonder why people don't want to get rid of social security and go to private accounts. If they aren't smart enough to leave it in the plan or roll it over to the next one, they will be the ones in retirement living off social security. IMO DUMB DUMB DUMB DUMB.

dbax791

Yup, I agree 110%. I have to confess that I was guilty of cashing out my 401K at one point, but fortunately I was young enough in my life that it wasn't too hard to rebuild. Dumb, dumb, dumb decision on my part. I try not to think about how much that money would be worth today.

Haven't touched the account since.

johnnymk

Initially, I thought..just another case of short-sighted Americans living for today.

But I know a lot of people who wish they would have pulled all of their money out in 1999-2000, who still haven't recovered from the stock market collapse of those years. And considering the terrible returns in the money market and bonds up until now, who can blame them?

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smeakim

Come on now. The 401k is for long term investing. If you look at the market from the 40's until today you will see an overall gain. Now in my case I was not around so lets look at the 80's. If you invested and left your money in the market from 1980 to 2005 and left it right where it was you would see that you would have had a 14% annualized return on your money. If you timed the market over that time, you would see that if you just missed the 20 biggest up days of the entire period your return is only 8.7%. You take than and miss the 20 biggest up days for the time and you only have a return of 2.7%. Yeah you would have been smart to pull your money and put it into bonds for the downtime but that does not mean cash it out. You also have to realize that you can't just let your money sit there. You have to take some responsibility to watch over your nest egg. Most places today even off what they call lifestyle funds which is pretty basic. More aggressive when you are young, less when you get old taking out all the need to really pay attention. Also if you look at just the S&P you will see that from 1931 to 2004 that 71% of the time the market was up overall for each year and 29% was down. This includes the bull and bear markets of the last few years. I am no whiz kid when it comes to investing, but 401K plans are for the long run not for market timing and for stupid people to cash them out becuase they want a new boat or go on vacation. Now there are certain circumstances which warrent this but not for those types of figures from that article. If people really want to be smart they would have taken out a 401K loan over those down years. Yes you lose the increase in equity over that time but the loan is paid back to only your account. You could take out have the value of your account when the bubble bust, and pay yourself back 5% and have a 5% return over those couple of years. Still somewhat stupid, but at least you have a guaranteed 5% return, the money goes back in, and you only lose the gain from the portion you took out. I did it, but that was over the couple of down years and made sure it was paid back in two years. People just don't understand there are many other ways to get money without raiding the retirement account.

bachviet

I would roll it over to an IRA.

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cruelpupet

I think many of those people are looking at it wrong. Most people when investing consider paper profits theirs before they think about selling. So when someone invests 100k and the stock goes up 500% then drops 200%, they feel they lost money. In reality nothign is made untill you ccash out.

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Merlin

I can. Of course hindsight is 20/20. If I knew when markets would move I'd love trade on it but the truth is that I don't. And nobody else does. What you need to do is pick a good asset allocation and stick with it. Attempting to time the market but pulling money out of a long term savings vehicle is the best way never to get anywhere. So timing market bad - Disciplined approach good.

VTGreg

This is absolutely true. Those that attempt to time the market typically end up losing their shirt. In addition, there are typically fixed return options to invest in so instead of pulling your money out of your 401k and paying the penalty and taxes, these individuals could just change how their 401k is invested.

Unless an individual is in dire need of the money (not to purchase a boat or car or any other toy), there is really no excuse to pull the money out of a 401k.

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WhiskeyPapa

That money was never theirs to begin with. Until you sell, you don't realize the gains. They didn't sell, therefore, they never had the money to lose. I'm so sick of people whining about their pre-2000 "wealth" that was supposedly lost.

BTW, the stock market didn't collapse. It's simply corrected a decade of unwarranted growth.

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johnnymk

A friend of mine hasn't even recovered the amount he initially started with..and it's not his imagination, either.

Just rememeber, if you invested $100,000 and lose 50 %, you will have to gain 100% to get back where you started. There are very few places to regain those kind of returns today, even after 10 years.

And very few people made 500% on their investments, even during the gogo days of the nineties.

LegendKiller

As with anything, perception is key. I have a problem convincing my family of this very fact.

My brother and I sit down every year and re balance his TSP through the gubment. I adjust the different funds to what he should have to reduce risk but keep a good return. Every year the foreign fund is usually much higher through appreciation. I have him sell it, redistribute the rest to the proper % until next year.

Every year he talks about how he "lost" money on the domestic fund (or another) so why should he sell his best performing stocks.

It is an easy trap to get into and most people don't have the knowledge to realize what they are doing wrong.

Merlin

Ah, the constant mix strategy. What I like to do myself. In a tax deferred account with fairly low trading costs I think that is really the best thing to do. Keeps risk under control and takes advantage of performance differentials.

LK, watch him change his tune this year when you rebalance. As the USD has been stronger you'll be reallocating to international funds rather than away from them. His head'll spin.

VTGreg

Only so much rebalancing is needed with the TSP since there are only 5 or 6 choices. You sure can't complain with the % they match though.