Last year, the nice folks at Hewitt Associates
So what's wrong? Well, that 45% of people who cashed out their plans may be playing with fire. Many, if not most, of us are dependent on 401(k) plans for a significant chunk of our retirement income. So cashing it out instead of leaving it invested is denying yourself a future income stream.
Even if you only had $10,000 in your 401(k), if it grew at the market's historical annual rate of 10% per year, it would amount to around $108,000 in 25 years (and nearly $175,000 in 30 years). If you planned to withdraw 4% of that money per year in retirement, as our Rule Your Retirement newsletter has advised for many people, $108,000 would generate more than $4,300 each year in your golden years, while $175,000 would kick out $7,000. See the power of that money? You might not think much of the $10,000 and might consider using it to help buy a new car, but if you let it grow, you could end up receiving $4,000 to $7,000 per year thanks to it.
The Hewitt report's numbers offered even more reason to be sad. Which workers were the ones most likely to cash out? The young. Some 66% of those 20 to 29 years old did so. Granted, they may not have as much as $10,000 in their accounts, but they do have the longest time frame in which their money can grow. A sum of just $5,000 can become more than $225,000 in 40 years, as a 25 year-old becomes 65. That could generate an annual payout of $9,000.
Learn much more about how to use your 401(k) intelligently in our 401(k) nook. And if you leave your job, consider rolling that money into an IRA for greater flexibility in investing. With 401(k)s, you're limited to what your employer offers you. It could be five funds or 100 funds, and many of them might not serve your needs well. Imagine, for example, that you believe in the future of Sony
Don't neglect your retirement. Make smart decisions today, and you'll be thanking yourself profusely tomorrow. If you'd like some help, my own favorite retirement information resource is our Rule Your Retirementnewsletter, edited by Robert Brokamp, which you can try free for 30 days.
Here's a sampling of some very useful articles from past issues:
- In the February 2006 issue, the effects of inflation on one's retirement were covered, along with tips on how to plan for inflation. The same issue also reviewed Joel Greenblatt's "magic formula" for investing, which has helped him achieve eye-popping average annual gains of 40% over 20 years.
- In the January 2006 issue, Robert tackled asset allocation and explained how we can "avoid Uncle Sam's grabby hands." He listed a host of popular investments, such as bonds and dividend-paying stocks, in order of tax efficiency.
- In the May 2005 issue, readers were taught how to withdraw money prudently in retirement in order to make it last.
- The October 2005 issue delved into dividends and offered some recommended dividend payers.
- The December 2005 issue covered real estate investment trusts (REITs) in detail, recommending some promising investments.
Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article.