Time To Plug The Holes In Your Retirement Bucket

leaky bucket

American workers might switch jobs 10 or more times in a career, each time running the risk of losing hard-earned retirement savings.

Are your retirement savings leaking away?

That happens far too often when workers withdraw funds from their retirement accounts after leaving a job. That can lead to tax penalties for early withdrawals and shrinking retirement savings.

Most of that retirement leakage occurs when people change jobs, based on a study by the Employee Benefit Research Institute (EBRI).

“Participants will commonly cash out a retirement account with a relatively small balance rather than roll it over to their new employer’s plan or an IRA,” said researchers.

Unfortunately, U.S. employees now change jobs 11 times before retiring, on average. And each time they switch jobs, they need to decide what to do with their 401(k) savings. That’s 11 opportunities in a career to blow their future by making the wrong choice.

Changing jobs isn’t the only way to squander retirement savings. Other sources of leakage include hardship distributions or participant loans.

A 401(k) loan can do serious harm to your savings.
See our article on How To Avoid Making A Big Mistake With That 401(k) Loan

What are the best ways to stop your hard-earned retirement funds from slipping away?

  • When you change jobs, make sure your retirement savings keep working for you. Roll them directly to an IRA under your control or to the 401(k) plan at your next job. This keeps your funds sheltered from tax and preserves your nest egg.
  • Build up your own emergency fund and don’t plunder retirement accounts to serve that purpose. Taking money out of retirement accounts – even for short-term loans – has devastating long-term consequences and can sabotage the savings you need for your future. 
  • Start saving in your 401(k) as soon as possible, contribute the maximum (or at least 10% to 15% of your earnings each year), and invest appropriately given your age and goals.

Why does all this matter? For most Americans, their 401(k) – coupled with Social Security benefits – will provide most of their income when they stop working. Raiding your 401(k) every time you leave a job will leave you with absolutely nothing. So plug those rollover leaks, and keep the funds safe inside a retirement account or Rollover IRA. Treat your old 401(k)s with care, so they can take care of you.

About Mari Adam

Mari Adam, Certified Financial Planner™ and President of Adam Financial Associates Inc, has been helping individuals and families chart their financial futures for over twenty-five years. Have a question about your financial situation? Ask Mari!

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