Changing jobs can be a stressful event. At the same time you are learning new job responsibilities and acclimating to a new company culture, you have to juggle financial decisions such as choosing new employee benefits. An often neglected detail of this process is what to do with your old retirement plans. We often work with clients in “cleaning up” these old accounts that multiply and are lost track of over a career. With all the complexities of rolling over old plans, studies are showing many younger professionals are just cashing these plans out. I recently discussed this with Ann Carrns of the New York Times. I explain why I see this happening. Here is an excerpt from that article:
[Jake] says when young adults are switching jobs, money is often tight — they may be moving, and need financing for rental deposits and other costs — and it is tempting to withdraw the cash. In addition, he said, it is often difficult for them to envision retirement, when they are just starting their careers.
Besides the tax consequences of this action, which can be high, cashing out small retirement plans cheats the individual out of their most important asset — time. The more time you have in investing, the less you need to “save” to end up with the same pot of money at the end. By cashing out now, you are cheating your future self. By putting off savings, you end up saving more and ending up with less value at retirement.
It is easy to see why someone in their 20′s or 30′s would be so willing to make this trade-off. Retirement is an abstract concept many years into the future. I try to counteract this thought by aiming for a different goal. Replace the concept of “Retirement” with “Financial Independence”. Financial independence is having the freedom from working to support your lifestyle. Instead, you have the financial flexibility to work, volunteer or even not work and follow your passions.
The entire article was printed in the October 5th Edition of the New York Times, which you can read online by clicking this link.