Don’t let door hit 401(k) as you leave workplace
PHOENIX – There are plenty of financial sins out there, including not saving enough, failing to take advantage of available tax deductions and spending lavishly on cars, clothing or vacations that you can’t afford.
But when it comes to misbehaving with money, it’s hard to top cashing out of workplace retirement plans and failing to get back in.
It’s more common than you might think, and employers unintentionally might share part of the blame.
You can trigger significant tax and other costs when withdrawing money from 401(k) programs before retirement age. Yet 41% of employees cash out when they leave jobs, voluntarily or not, and most of these people drain their entire accounts, according to a new study conducted by researchers Yanwen Wang of the University of British Columbia, Muxin Zhai of Texas State University and John Lynch Jr. of the University of Colorado.
In preparing the study, called “Cashing Out Retirement Savings at Job Separation,” the researchers evaluated the withdrawal patterns of more than
162,000 employees covered by 28 retirement plans, from 2014 to 2016.
“When people cash out, they are back at square one, with no more savings than they had when they started” a job, the researchers wrote in a statement. “They set themselves back years in the ability to accumulate enough savings for a comfortable retirement.”
Of the workers who tap into their retirement accounts upon separating from employment, 85% withdraw everything. American workers hold about
12 jobs over their lifetimes, staying with each employer for about four years on average, according to online job-search company Zippia, so there are plenty of opportunities to cash out.
This helps to explain why the median or midpoint
401(k) balance was only $27,376 in 2022, about the price of a newer used car, according to Vanguard’s “How America Saves” report for 2023. The average balance was a more-respectable $112,572, boosted by the relatively small number of workers with hefty accounts. One in 3 workers has less than $10,000 in a
401(k), according to Vanguard.