With a piggy bank, you put money in and take it out. It’s a fairly simple tool, and it’s great for what it’s used for. A 401(k), on the other hand, is a great tool to save for retirement. But increasingly, they are being used as something they aren’t: piggy banks.
Recent studies show that Americans are increasingly pilfering from their 401(k) accounts. With the economy being the way it has been since the financial crisis, that’s understandable on one level, but the choice can put your retirement plans on a slippery slope.
According to the IRS, a whopping $57 billion was withdrawn prematurely from 401(k) accounts in 2011, up 37 percent in inflation-adjusted dollars from 2003. You could argue that if a person needed the money to survive, then an early withdrawal from a 401(k), even with the tax penalty, is better than most other options – to a point.
Unfortunately, younger individuals are withdrawing the most. According to a recent study, nearly 40 percent of workers between 20 and 39 cash out their plans when they change jobs.
While there can be many reasons for this, the study points out that many don’t see the need to roll over their old plans when the amount is ‘only a few thousand dollars’ or more. Add those people who withdraw from their plans to buy real estate, and the result is a worrisome trend indeed.
The real purpose of a 401(k)
Compared with the past few decades, the burden of retirement planning now falls squarely on the individual, i.e., you. Only about 30 percent of companies still provide pensions, and even among those, firms are freezing them in a short-sighted attempt at controlling pension payouts down the road.
In light of this, a 401(k), with its tax-advantaged status, is probably one of the best options for putting aside money for retirement. While there may be times where you need to take out loans for different purposes, simply cashing out a 401(k) should be avoided at all costs.
This is especially the case if you switch jobs: When that happens, you will want to either roll over your 401(k) into your new plan or into a rollover IRA. Not only does this help you avoid losing money due to early withdrawal penalties, but keeps the power of compound growth on your side as you build up your retirement nest egg.
Go long for your retirement savings plan
The rise in early 401(k) withdrawals reveals a broad lack of understanding about retirement planning. Saving for your old age is a marathon, not a sprint — one that takes decades to complete. By raiding your 401(k), you drastically cut your options and can end up harming your financial future. Unless you plan on working until you’re 80, it behooves you to leave your savings untouched so you can retire when you plan to.
When considering amounts under $10,000, it can be easy to think that they’ll mean nothing in the long run. But if you invest it wisely and let it stay in the market long-term, it can build on itself to and turn into serious money each month for you in retirement.
Part of saving for retirement is making sure we’re doing what’s best with our 401(k) funds. If you’re tempted to withdraw money from it early, ask yourself if raiding your savings now is the best decision for your long-term wealth. In most cases, it’s not.
FM International Services (NY), Ltd. provides a wide range of retirement services featuring customized benefit plans, flexible investment options, and centralized pension administration. Through Fmi’s countless services, businesses of all sizes create unique domestic and international retirement plans for two employees or two thousand – with a single provider handling conversion, setup, and administration.
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