Don't Make This Humongous Life-Wrecking Error

Just for a moment, imagine that you're being laid off. (I know, for some of you it's not so much "imagine" as "relive an unpleasant recent memory." Hang with me here.)

Generally, when one is laid off, there's a bunch of paperwork to crank through. One of those papers will probably ask you what you want done with your 401(k) balance. Again generally, you can leave it in your now-ex-employer's plan, roll it over to an IRA, or take the balance (minus taxes and penalties) as a cash withdrawal.

When you're in the throes of Holy expletive, I'm losing my job!, that last option seems awfully tempting. I know, I've been there. And according to a new study by Hewitt Associates, nearly half of employees who left their jobs last year (voluntarily or otherwise) took the cash.

I don't know the details of every case, but I do know this: For almost all of those folks, that was a bad move.

I know you think you need the money
Look, like I said, I've been there. I got laid off in the wake of the dot-com bust and was out of work for months. I know the cold feeling of the fear that sets in, deep in your gut, and I know the urge to liquidate everything you can and stash the proceeds under your bed.

I get it.

But here's the thing: Being out of the market now could leave you seriously broke later, like in retirement. You may think it's "only" $100,000 or whatever now, but that $100,000 earning 10% a year -- the long-haul stock market average -- for the next 30 years is $1,744,940 you'll have at retirement.

Or won't have, if you cash it out.

But the stock market has been lousy for years!
Yes and no. It's true that the S&P 500 is about 300 points lower than it was 10 years ago, but plenty of stocks have made huge gains over that time. Even measuring from October 1999 -- near the top of the dot-com bubble -- to today, we can find stocks that have appreciated handsomely:

Source: Yahoo! Finance. 10-year returns are from Oct. 29, 1999 to Oct. 29, 2009 and include reinvestment of dividends, if any.

For comparison, a generic 10% a year over the same time period would have yielded a 159% total return, but as you can see, plenty of stocks beat that -- despite the fact that the major indices don't reflect it. What I'm trying to get at here is that even through "tough times," there's growth in the market. That's growth you need to be participating in, and will be participating in -- unless you cash out.

If you're still tempted, just remember this: The average Social Security payment is less than $1,200 a month. You can augment that with the $1.7 million or not. Your call.

So what do I do instead? I need some cash!
Do you? Are you sure you need the cash? Have you sat with it for a few days, looked at your likelihood of finding another job soon, figured out what household expenses you can cut, or figured out what your unemployment payments or severance will be?

If you really do need cash, and you really need to crack open your retirement accounts, there are several steps you should explore before you crack open your 401(k). That should be your last resort. Before that, explore these options:

• A 60-day IRA rollover. If your cash need is short-term, you've got enough in your IRA, and you're sure you'll be able to repay in 60 days or less, this can be a very useful option. Learn more here.
• An IRA distribution. There are circumstances under which you can take an IRA distribution before age 59 1/2 without paying the 10% tax penalty. You can also withdraw your contributions (though not your returns on those contributions) from a Roth IRA at any time with no penalty. Go here and here to learn more.
• 401(k) loans. If your spouse is employed (or if you're still employed), taking a loan from their current 401(k) may be an option. A 401(k) loan has many downsides, but it beats cashing out if you're in dire straits. For many, this will be the best option. Learn more here.

But whatever you do, don't withdraw your retirement savings unless you really have to -- the cost, now and later, is just too high.