Years ago, it was pretty common to get a job out of college and stick with the same employer for decades. But nowadays, job-hopping is not only pretty common, but more than acceptable.
People who move around from one employer to the next aren't automatically regarded as fickle. Rather, they're often seen as go-getters who aren't afraid to step outside their comfort zone and pursue new opportunities.
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But while leaving a job for a better one is a move that has the potential to help you financially, cashing out your retirement plan every time you leave an employer could have the opposite effect. So if you're gearing up for a job switch, you'll want to be careful about how you manage your 401(k).
Don't just take the money and run
In a recent letter to investors, BlackRock CEO Larry Fink said: "[S]tudies show that about 40% of employees cash out their 401(k)s when they switch jobs, putting themselves back at the starting line for retirement savings."
That statistic is awfully alarming. The reason? Cashing out a 401(k) could have seriously negative consequences.
For one thing, if you cash out a 401(k) prior to turning 59 1/2, you'll face a 10% early withdrawal penalty on your plan balance. But also, as Fink said, you'll effectively be starting over on the retirement savings front -- or at least taking the money in that 401(k) away from your future self.
And remember, when you cash out a 401(k), you don't just pull a given sum of money out of retirement savings. You also deny yourself the growth that could've been attained on that sum.
Let's say you cash out a $5,000 401(k) at age 30 when you switch jobs. You might think that's no big deal -- you have the rest of your career to build up a solid nest egg.
But let's say you decide to leave that $5,000 in a retirement plan instead. If your investments generate an 8% average annual return, which is a bit below the stock market's average, by age 65, that $5,000 will be worth about $74,000. And that's a large sum to forgo.
What to do with an old 401(k) when you leave a job
When you leave a job, you may have the option to keep your old 401(k) where it is. But a better bet is generally to do one of two things -- either roll your old 401(k) into your new employer's 401(k) if that option is available to you, or roll your old 401(k) into an IRA. Beyond that, your best bet is to arrange for a direct rollover where your 401(k) funds land in your new retirement plan automatically.
Either way, think twice about cashing out a 401(k) when leaving a job. Even if it's a relatively small amount of money you're talking about, it could amount to a lot of missing savings by the time your retirement rolls around. There's also something to be said for avoiding a penalty for accessing the money you no doubt worked hard to save.
