Don’t Cash Out Your 401(k)

When I read the statistics from Vanguard, in their How America Saves 2008 report, I was astounded by the statistic that 60% of Americans who change jobs will cash out their 401(k). That’s right, for every ten people that switch jobs, six will take all the money they’ve diligently saved into their 401(k) accounts and withdraw it, minus the taxes they owe and the whopping 10% penalty the IRS demands. It is likely one of the biggest mistakes of their lives.

For some, there is no choice. If you are fired and facing mounting bills, you may have no choice but to cash out your 401(k) to meet your obligations. In that situation, it’s unfortunate but you have to do what you have to do. However, in 2008, 4 million people hadn’t lost their jobs. In 2008, the economy was weak but not in the state it’s in today. In 2008, 60% of people leaving their jobs cashed out their 401(k)s and they likely didn’t have to. They weren’t in dire straights, they were just making a mistake.

Your 401(k) is your nest egg, it’s supposed to be untouchable and safe and put in a safe place so it can grow. While it’s true that the market has been pounded, if you’re ten, twenty, or forty years away from retirement; the last thing you want to do is to arrest that growth by withdrawing the funds. To make matters worse, not only have you stopped its growth, you’ve paid a 10% penalty on top of that.

The best thing for you to do if you don’t feel like the 401(k) is right for you, which for many is erroneous, stop contributing or contribute the bare minimum.