For those who hope younger generations will be smart with their money, the bad news continues. According to a Fidelity Investments survey from last year, roughly 40% of workers in their 20s and 30s cash out their 401(k)s or 403(b)s when they switch jobs.
Yowza! Clearly, financial illiteracy remains a big problem in America. If these folks knew more about the importance of saving and investing, and about how money grows, they'd behave differently.
Say you're 30 years old, and you cash out a 401(k) account with $20,000 in it. To you, it's a little windfall, enough to buy a new car or maybe pay down some debt. You need to think about what else it could be, though.
If you plan to retire at age 65, leaving that money alone would give it 35 years to grow. If it grew at an average annual rate of 9.5%, it would ultimately become about $480,000 -- nearly half a million dollars! And that's without adding anything further to the account. If you then withdrew 4% of that money each year in retirement, as has been suggested in our Rule Your Retirement newsletter service, you'd yield $19,600 per year. See what you're throwing away if you cash out now?
Topping $19,600
Lately, of course, it's been tough to find stocks that are able to meet that 10% average. Plenty of stocks, including Bank of America
But over the long haul, good returns are attainable. Check out these average annual returns for some familiar names:
|
Company |
20-Year Average Annual Return |
|---|---|
|
Coca-Cola |
11.6% |
|
Chevron |
11.9% |
|
Intel |
17.3% |
|
PepsiCo |
11.8% |
|
Lockheed Martin |
11.0% |
Source: Yahoo! Finance.
If your $20,000 nest egglet grows at 13% on average every year, in 35 years it will turn into a rather hefty $1.44 million. Just look at that! That's nearly $1 million more than you'd earn at 9.5%, and it's just about enough for most of us to retire on, especially if it's supplemented with Social Security or some other income. Withdrawing 4% of it yearly will give you an annual income of $57,600 to start.
Why so much?
If you're wondering how an entire retirement could be based on a 401(k) account that was left alone after the owner turned 30, the answer is compounding -- and the power of time. You could duplicate the results by saving and investing in your 30s or 40s or 50s, but you'd have to save and invest a whole lot more each year. The beauty of early money is that that it has so much time to grow, even if it doesn't seem like a princely sum.
Remember: A dollar saved today can do much more for you than a dollar five or 10 years from now can do.
Other considerations
Here's a simple, additional reason to leave your account alone: early-withdrawal penalty fees. Why fork over 10% of that bundle when you can just leave it to grow -- especially since you'll be paying taxes on the sum upon withdrawal?
And don't think you're limited by just the funds available in your 401(k). If you're leaving your employer, you can roll all your money into an IRA, where you can invest in all kinds of funds, individual stocks, and even bonds.
Learn more about retirement investing with these great resources:
- Take a look at our IRA collection page.
- This could be the best move you ever make.
- Stay away from these top-performing investments.
And for detailed guidance on retirement planning, you can test-drive our Rule Your Retirement newsletter service for free. A free trial will give you full access to all past issues. It regularly offers recommendations of promising stocks and mutual funds.
