Don't Cash Out Your 401k!
This is another guest post from Joe Plemon from Plemon Financial Coaching. Joe is the Money Columnist for The Southern Illinoisan.
Q: I am so worried about my 401(k) retirement account. I am planning to retire in three years and the value continues to drop. Should I cash out my 401k now in order to avoid further losses?
A: There are two reasons why selling right now is not in your best interest.
Taxes = Ouch!
First, if you are under 59 ½ years old, you are going to owe penalties and also pay Uncle Sam a lot of taxes. You would take a bigger hit from cashing out than any further drop in the stock market would affect your portfolio.
Joe is right, cashing out your 401k prematurely will incur a 10% penalty plus ordinary income tax. For the average working couple, that stands to be a 25% hit. Ouch!
Longer The Better
Secondly, you need to think long term, even if you are close to retirement. If you are healthy, you will probably live for 25 or 30 more years. Selling when the market is down will lock in your losses and therefore limit the size of the nest egg you will need to carry you through the next three decades.
The Funk
Yes, we are in an economic funk, but our economy has a history of remarkable resiliency. Since 1948 we have gone through ten recessions and rebounded from them all. Is history always an accurate predictor of the future? Of course not, but since none of us has a crystal ball, what else do we have? These ten recessions averaged ten months in length and a 39% one-year return from the recession low. I am not saying that your 401(k) will grow 39% in the next year, but, based on history, I believe it will be worth much more in five years or ten years than it is now.
Uglier On Paper
Remember: your investments may look bad on paper, but you haven’t actually lost any money in your 401k until you sell. We are on a roller coaster ride, but the only people who get hurt on a roller coaster are those who jump off.
Be patient and wait. Think long term. Ten years from now you will look like a genius by keeping your money in your 401k.
photo by Thomas Hawk
Securities offered through LPL Financial, Member FINRA/SIPC
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LOVE your “expert” blog. It’s a very interesting and educational read. I also LOVE your wife’s blog. Her give-a-way is GREAT!
Wow, thanks for all the great tips! But, I must say…your blog is cool but your wife’s blog is better! (Sorry…doctor’s orders!)
Have a great day!
Kelly’s last blog post..Groovy Give Away!
Awesome money news here! I wish I could enjoy this kind of stuff, but it seriously sends me way over the edge. Just wanted to let you know that your wife has an awesome blog, a little better than yours. Sorry guy, it’s just how things go down here. …whatever that means?!?
You’re blog is great…
Such a great job, but it must be hard living with a wife who’s blog is SOOOOOO MUCH BETTER!!!
hehe..
Brittany Bell’s last blog post..Happy Wednesday
What about prior to 1948 when FDR simply took peoples savings and began taxation as high as 100% above a 25K earnings? Also, there has been chatter in congress surrounding options for fixing our retirement plans and Social Security. One option that was recommended was taking all of our retirement plans under govt control and infusing the money into social security or a new plan that would be created as a welfare strategy for us after retirement age.
Not from an economist standpoint and obviously these ideas are only scary when viewed against the current strategies under the Obama administration and the obvious love for FDR’s public spending and corporate controls. But unfortunately prosperity in the ways we have seen in the past only holds true if we are at least partly capitalist as a society. If we become primarily socialist all of your metrics since 1948 are thrown out the window and we have to look at different types of economies like europe for likely future outcomes.
For what it is worth I am 34 and had over $170K in my retirement last year, now I have under $60K, painful is an uderstatement, I would have actually done better putting the money in a mattress. Two things are scaring me most the bailout packages from Bush and Obama and the fact that last september there was a mass electronic exodus of over $550B in one hour from the US money market accounts that cannot be traced. When this happened they closed down all banks because all world economies would have failed within 24 hours (this info came from a PA congressman in an interview). We have never seen times like these and the government is not considering the inherent benefits of capitalism, this level of spending by the government and corporate control has never been seen before in the US to my knowledge. It is more than FDR even.
But what if—my current value is only $16,000? And I’m 44. And I could pay off my credit cards, freeing up $500 per month to put in my Roth (or just in the mattress for a while)? My only other debt is my house payment. I bought that last year, so no equity here and value slashed to half. I’m wondering if it wouldn’t be better to take the hit now, get rid of all debt except the mortgage, put those credit card payments into my tiny Roth? The rules have all changed now–we haven’t done THIS before. What do you think? I’m thinking maybe it’s the smarter thing to do for MY BENEFIT in the current climate.
I understand the premise of “hanging in there.” But for how long? Rule of thumb with stocks is to bail after loosing 20%. Why is that rule different a 401k? I know “conventional wisdom” got us all into this mess. Why should I follow it and stay in? I think I should take my lumps and walk away.
@ Matt N. Keep in mind that it’s all relative on a few things. 1. Where are you at in your life 2. Can you stand it emotionally. I’ve had clients that are literally sick from the whole situation. Your emotional and physical health is more important than “hanging in there” and I would never encourage someone like that to stick it through.
I’m not sure on what stage you are in your life, but I challenge you with this. If you do cash out now, then what’s the next step?