Don't Cash Out Your 401(k)

People can make mistakes with their 401(k) accounts.

Many invest the funds too conservatively. (If you have a 10- to 20-year investing time horizon, you should probably have a lot of stocks in your portfolio.) Others fail to put much, if anything, into their 401(k) in the first place.

And then there's early withdrawal. When you switch jobs, you are offered a choice of cashing out your account or rolling it over into another account. Too many people take the cash. Others withdraw funds early because they have some other need for the money.

On our Credit Cards and Consumer Debt discussion board a while ago, I ran across a painful story shared by a Fool community member named Roy. He explained that in his late 30s, he had accumulated $82,000 in his 401(k). When he and his wife moved back to St. Louis, he planned to work as a consultant, and his wife wanted to open a wallpaper store. 

Roy emptied his 401(k) to fund the store, paying 10% penalties on the withdrawals and not earning a consultant's paycheck due to working with his wife. Eventually he saw the business go under, due in part to competition from big retailers Home Depot (NYSE: HD  ) and Lowe's (NYSE: LOW  ) .

Roy noted that the $82,000 in 1996 would have probably grown to more than $200,000 today, and around $750,000 by his retirement. Here -- read his agonized words:

Makes me sick to think about it... All from a very quick decision to take money from our future and spend it on today... If anyone has even the thought of robbing [their] 401(k) because of a job change or a new start in life or whatever, DON'T TOUCH YOUR 401K -- sink or swim on your today dollars, not on your hard-earned future nest egg.

Fortunately, the story has a happy ending. Roy reports that since discovering The Motley Fool, he and his wife have turned things around. Getting rid of $45,000 of debt, Roy hopes that by the end of the year, he'll have built his retirement savings back up to that $82,000 level.

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9/23/2016 4:00 PM
HD $127.79 Down -0.96 -0.75%
Home Depot CAPS Rating: ****
LOW $72.35 Up +0.27 +0.37%
Lowe's CAPS Rating: ****