I like to learn things the hard way. I spent my 20’s making every sort of financial mistake. In the past I would read financial advice and promptly dismiss it from my mind. I had my excuses, it didn’t work for me or I didn’t have enough money to save. My lack of savings cost me in ways big and small, first I ran up too much debt. Then when I got downsized in 2002 and didn’t have an emergency fund to fall back on, I cashed out my 401(k).
It was the right choice at the time, but the wrong choice for my long term financial health. I knew I would be getting unemployment, but I didn’t know how long it would be until I found a new job. I was scared without any savings so when the paperwork came to either rollover or cash out my retirement plan, I took the cash. Cash is like a security blanket, it keeps you safe and warm. At least I learned a lesson that day, I learned that I really like savings. But it came at a price, a 10% early withdrawal penalty.
I had a new job two months later, but I never put the money back into a retirement account. My new job didn’t offer a 401(k) either. In fact I didn’t start contributing to retirement again until 2005, I was back at the starting line. I had co-workers with six-figure retirement accounts, there I was heavily in debt and with zero in my 401(k). I still lag behind my peers, the collapse of the stock market has hit my young portfolio especially hard.
The only 2008 numbers I can find come from Fidelity, who says the 401(k)s they manage fell 27% last year to an average balance of $50,200. As you can see from my net worth, I’m well behind that figure. When compared to my income group, I look even worse. In hindsight I should have left my retirement savings alone and forced myself to live solely on unemployment. Because I cashed out my first 401(k) and didn’t start another for years, I’m late to the start of the retirement race. Did I ever mention I’d like to retire early?
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10 comments:
I cashed out my 401k too when I left work to go to law school. At the time, it was so little money (probably less than $5k) since I only contributed to it for less than a year. But even with the market downturn, had I kept the $5k in a rollover IRA or something, I'd still have the $5k intact. Bummer...
I did the same thing once. Sigh... the lessons we learn.
I have a question though, didn't you recently say you got a raise? Could you use some of that to start investing in an IRA?
@Kat - yeah since that money was invested starting back in 2000, I'd probably still have most of it.
@Dawn - I am using the raise for some of my goals which include starting a Roth IRA this year.
http://www.misformoney.net/2008/12/financial-goals-for-2009.html
I have been contributing to 401(k)s for the last few years, though I don't contribute the maximum.
Then again, I only have about half the money I originally contributed to my first IRA that was done the "right" way (rolled over out of employer plan w/fees, recently rolled into existing employer plan). It's mostly been feeding bank fees. :P Oops.
I guess 9 out of 10 people would have cashed out an IRA in the situation that you were in. Guess its just one of those hard lessons that can only be learnt the hard way.
Yup. Here, here. Did the same thing. I am posting a retirement issue tomorrow (3/7). I finally took a look at my retirement funds and had to run the #s of where I should be and how far (away) I am from achieving such justice that will allow me to retire early.
How to make it a reality while balancing all the other financial issues that come up! Arg! :)
Don't beat yourself up to hard. Just find a way to enhance the retirement pot.
I feel for you. For what it's worth, I admire you! I think you are great with financial decisions. :) Things will turn around for you. You are smart and motivated!
Hi there-I'm not currently contributing at the moment, something I do need to address fairly soon. Wishing you well on sorting this situation out my dear.
I'm so confused - I'm in this same situation, trying to determine whether or not I should cash out my previous 401k plan for a "safety net" fund during rough times, as my savings account is dwindling. My 401k fund is nothing to brag about (under $5k), but it would certainly be nice to know it's readily available if I'm in a crunch and can't pay the mortgage. I don't understand why there always seems to be regret from people who have previously made the "mistake" of withdrawing early from their retirement plan funds - the minimum amount needed to retire these days is $500K (at least) isn't it? Why is it such a big deal to start saving from scratch again for retirement when the amount I've contributed so far barely puts a dent into the total amount I'll need in the long run anyway? It seems to me that if I want to retire at a normal age, then eventually I'll have to get serious & start contributing a larger percentage of each paycheck to a retirement savings plan (more than just the matching %), so what's the harm in withdrawing the measly amount I've put away so far for security purposes?
In my comment above, I meant to ask, what's the harm in withdrawing BESIDES the obvious early withdrawal penalty of 10% or whatever it is. Without factoring in that little inconvenience, is it really so bad to start over with retirement savings if you didn't have that much saved up to begin with?
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