I have good news and I have bad news.

The bad news is that out of the $293 billion Americans put into 401k accounts each year, more than 25% of the money gets withdrawn via cash-outs or loans to pay bills.

The good news is that if you are broke in your old age, you will be in good company.  

Just kidding, the actual good news is there is still time to get on track.  By the way, I’ve included a chart showing how much you have to invest each month to hit a million dollars in this older post.  I’ve also written on how much money you should have saved for retirement by age 30.

Last week I came across a Washington Post article called, “401(k) Breaches Undermining Retirement Security For Millions” which gave some scary stats. I’ll share with you a few which I found particularly interesting.

You wish you had a pension!

In 1980, 4 out of 5 private sector workers had a defined benefit pension which provided cash for life based on salary and years of service upon retirement; nowadays, only 1 in 5 has a pension.  This means that a 401k (or similar plan) will be the PRIMARY means by which most Americans will survive in retirement.  That means YOU. If you think Social Security will be enough to carry you to your grave in 20+ years…then email me immediately because I have some $500 pet rocks I’d love to sell you.

I just changed jobs, who needs that old 401k?

Umm, you do.

According to the study, 42% of people who changed jobs decided to cash out all of their old 401k instead of rolling it over.  Do you think these folks are reinvesting the money? Not likely.  Maybe these people are using the money to start a side business? Yeah right.

I’ll bet this money went to paying off debt, Amazon.com purchases, kitchen remodeling, and your local department store.

Here are some helpful 401k reminders for those about to quit or change jobs.

Who pulls money out the most?

1 in 3 people in their 40’s has withdrawn 401k money for non-retirement purposes.

People making less than $50,000…30% of them cashed out their 401k for non-retirement purposes.

Of those in the $100k-$150,000 range…12% cashed out.

150k+…only 8% of people cashed out their 401ks for non-retirement purposes.

Why is pulling money out of your 401k such a bad thing?

If you’re younger than 59.5 and not using it for a specific set of circumstances, you’ll be hit with a 10% tax penalty on top of paying income taxes on the money.  While 10% might not seem horrible, it is!  Not only are you killing a chunk of gains you’ve received over time, but you’re stealing from your old self to pay your young self.  In my humble opinion, the type of person who cashes out their 401k, isn’t the type that will likely ramp-up retirement savings anytime soon.  Qualified loans against your 401k must be paid back to avoid this penalty.  But again, the type of person that needs to pull this money out for any reason will unlikely pay it back.

Summary

While retirement talk often puts people to sleep and seems boring, the lack of preparedness among most Americans will certainly be a crisis in the future.  A lot of people I talk to tell me, “JG, I’m not worried; I’ll just work until I’m 80 or never retire.” What these people fail to realize is that retirement might not come on their own terms.  This recession has shown that older workers are being quickly replaced by younger, less-expensive workers in droves!  People who have worked for 30+ years at a company have been given pink slips as their job is no longer needed.

In short, as tough as you think times are right now, if you have a job, you can afford to put some money away for your retirement.  You can’t afford not to.

Here’s the link to the Washington Post article.

What are your thoughts?

~

JG

If you like what you’ve read here, send to your friends and subscribe! Just type your email address in the box on the right, and get my posts sent directly to your inbox! I don’t SPAM, so don’t worry.