Fixing Your 401(k) – Part 3

Problem #2 – Portability

OK, after taking a few days off for the Memorial Day weekend, I am back. There are still a few more problems to tackle with 401(k) plans as a retirement tool. Today’s topic is Portability.

Question: When you left your last job, what happened to your 401(k)?

Follow Up Questions: How many times does the average worker change jobs during their
working years? And what percentage of people cash out their 401(k)s?

In Gregory Crawford’s memo to President Bush in 2005 “The Looming Retirement Disaster“,
the average worker will change jobs 5-8 times during their working years. And says that 1 out of 5 will likely change in 2009.

The era of the “gold watch” after a long, loyal career is pretty much OVER. People may change for any numbe of reasons, but whatever the reason is, it may have a dramatic effect on retirement savings. There can be waiting periods to participate in a 401(k), the new employer
may or may not offer a plan, and there are interruptions in employer matching contributions.

And on average, this happens 5-8 times for the typical worker over their working life.

How many people simply cash out all or part of their 401(k)? According to Gregory Crawford,
an astonishing 55%. If you are younger than 59 1/2, you are subject to taxes plus a 10% penalty by the government. Without education, or belief that the market will come back, many people convinced that this is the right thing to do “before they lose any more.”

How exactly does this affect our savings?

In the last post, I showed how a worker earning $75,000/year for 20 years, putting in $6075 per year (8.1%) and getting a 4% match and an 8% average return would have saved
$431,901 in 20 years.

Using the same scenario, lets have this worker change jobs 3 times, with the last 10 years at the same job. We have just cut our savings down to $136,724. (Source Jackson Life – Rollover Rx). And if we take 5% income from that, we now have an income of $6836/year.

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