Workers cash in 401(k)s when they change jobs

  • Americans are rushing to cash in their 401(k)s, and it’s not just about running out of cash.
  • This is especially true for those changing jobs.
  • Cashing out when you quit a job can mean you’re missing out on big long-term savings, experts say.

Americans have been cashing in their retirement savings at an “alarming” rate.

So says Tom Leslie, head of communications at the University of British Columbia’s Sauder School of Business, in reference to a new study by Yanwen Wang, teacher at the school.

Wang, along with Muxin Zhai of Texas State University and John G. Lynch Jr. of the University of Colorado at Boulder, released the results of a study which found that nearly half of the 162,360 employees who left their jobs between 2014 and 2016 at 28 U.S. companies cashed out of workplace retirement plans like 401(k)s that incentivize saving over time.

This is despite the IRS ten% penalty, in most cases, for people under 59.5 who choose to cash out. Then there are the taxes: if you try to withdraw $10,000 before the age limit, for example, your immediate total could be as low as $7,000, depending NerdWallet. And finally, withdrawing early from a fund means workers don’t benefit from compounding interest over time.

“Compound interest is huge, and it’s something you really can’t get back once you’ve made a withdrawal,” said Ryan J. Marshall, a New Jersey-based certified financial planner. said CNBC in 2019. “There is no compound interest fountain of youth and we cannot go back in time. Once you miss the compound interest effect, it is lost.”

Job changers who cash in their retirement accounts treat them like bonuses rather than long-term savings tools

Wang and his co-authors wrote that there are several ways “pre-retirement leaks” — or tapping into your retirement fund early — occur: borrowing against a 401(k) and then defaulting on the loan, for example , or make withdrawals while actively employed .

Only a small number of people have done so, according to the researchers, while 41% have done so after quitting their job. And of this group, almost 90% withdrew all their funds.

The researchers said unexpected job losses or financial hardship aren’t the whole story. Among workers who withdrew from their fund after a job termination, only 27% were fired or laid off.

“Whatever benchmark you try to find, it cannot fully explain why such a large number of people would hit their 401(k) upon termination,” Wang said in a press release, adding that many workers struggle financially when they are employed and do not. not running to cash in their funds.

Wang said the withdrawals can mean workers treat their retirement funds like bonuses — especially in cases where employers make matching contributions — rather than a necessary savings nest.

“Sixty percent of their accumulated assets will come out of the 401(k) system when people change jobs,” Wang said. “If you look at how often people change jobs, on average every two to five years, that means they only have the 401(k) balance left from their last job. So people are not saving not enough for their retirement.”

She suggested that employers provide education and guidance to workers leaving a company about the consequences of cashing in a 401(k), and that policymakers should implement “automatic portability,” in which 401(k)s are automatically transferred to a new employer. or an Individual Retirement Account. She also said companies could set aside employee contributions to emergency funds that act as a “sidecar” for 401(k), the same way a flexible spending account works.

“Something has to be done — not to control people’s 401(k), but to provide enough knowledge that they are aware of the consequences of their actions,” Wang said.

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