For those who hope younger generations will be smart with their money, the bad news continues. According to a 2008 Fidelity Investments survey, roughly 40% of workers in their 20s and 30s cash out their 401(k)s or 403(b)s when they switch jobs. In the process, they may be blowing huge holes in their future retirements.
Play now, pay later
Say you're 30 years old, and you cash out a 401(k) account with $20,000 in it. Right now, that little windfall is enough to buy a new car or pay down debt -- but in the future, it could be so much more.
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 our Rule Your Retirement newsletter service has suggested, you'd yield $19,600 per year. See what you're throwing away if you cash out now?
In search of great returns
Lately, it's been tough to find stocks that can meet that 10% average. Even after last year's huge rally, plenty of stocks remain well below their levels from two years ago, including Citigroup (NYSE: C ) and MGM Mirage (NYSE: MGM ) .
But over the long haul, you can attain good returns. Check out the average annual returns from these familiar names:
|
Company
|
20-Year Average Annual Return
|
|
Caterpillar (NYSE: CAT )
|
13.1%
|
|
ExxonMobil (NYSE: XOM )
|
12.3%
|
|
Microsoft (Nasdaq: MSFT )
|
21.5%
|
|
3M (NYSE: MMM )
|
10.2%
|
|
General Dynamics (NYSE: GD )
|
28.2%
|
Source: Yahoo! Finance.
If your $20,000 nest egglet grows at 13%, on average, yearly, in 35 years it will turn into a rather hefty $1.44 million. 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 that sum 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.
Other considerations
Need yet another reason to leave that retirement account alone? Say hello to early withdrawal penalty fees. Why fork over 10% of your hard-earned cash, when you can just leave it to grow -- especially since you'll also pay taxes on the sum upon withdrawal?
Also, don't think that 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.
Take advantage of your savings
Learn more about retirement investing with these great resources:
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