By Brian Loy
Saving for retirement is tough enough. You’ve got to earn a living, sock a portion away on payday, invest it wisely, and emotionally weather the periodic market sell-offs. However, life’s surprises shall come your way – job loss or change, a major medical bill, education costs and others – and may cause (or tempt) you to tap your retirement savings early. The purpose of this article is to discourage you from creating pre-retirement leakage from your 401(k) and IRA account balances which can cost you up to 25 percent.
We know we’re supposed to save during our accumulating phase in order to fund our future retirement and spending phase. There are plenty of reminders from parents, spouses, employers, marketers and advisers. However, there are some interesting findings and insights from Alicia Munnell and Anthony Webb in their study “Impact of Leakages from 401k and IRAs,” released in 2015 on behalf of the Center for Retirement Research at Boston College. Munnell and Webb reviewed a 2013 report by Vanguard called “How America Saves,” household surveys (Federal Reserve’s Survey of Consumer Finances and the Census Bureau’s Survey of Income and Program Participation), and tax return data.
What is leakage?
There are numerous reasons why people tap their retirement prematurely and many leakage “types” – including “cash outs” when changing jobs, hardship distributions (medical costs, eviction or foreclosure), 401(k) plan loans, and moving in and out of retirement plan coverage. The “triggering events” for leakages include adverse events such as job loss and health issues (25 percent), job change (10 percent) and home purchases (8 percent); the rest can’t be accounted for. Some plans are very strict and limit hardship distributions, and others make it relatively easy.
Nevertheless, some people are willing to pay additional income taxes and possible 10 percent early withdrawal penalties, as well as being temporarily “locked out” of participating. Vanguard’s survey estimated about 9 percent of 401(k) participants were eligible for distributions in 2013 because of a job change, but only 71 percent preserved those assets for retirement (that is, left the money in the old plan, or rolled it over to an IRA or new employer’s plan) – younger people were more likely to cash out their old retirement plans than older ones.
Read the rest of Brian’s column at rgj.com.
Brian Loy, CFA, CFP, is president of Reno-based Sage Financial Advisors Inc. Contact him at www.sagefinancialadvisors.com.