401(k) cash-outs pecking away at nest eggs

Washington Post via Houston Chronicle ^ | January 3, 2004 | ALBERT B. CRENSHAW

[sarcasm]

Despite years of reasoning, wheedling and sermonizing from financial advisers and retirement planners, nearly half of all workers who change jobs cash out their 401(k) plan savings instead of leaving them to grow, either there or in some other form of tax-deferred account, according to a new study.

This behavior, at best, deprives workers of years of compounding, which can do miracles for even modest sums. At worst, it could undermine the entire premise of these “defined contribution” retirement plans, which is that a combination of worker prudence, employer assistance and tax benefits will enable workers to build up adequate nest eggs for their retirement years.

And there are additional costs. Cash withdrawn from a 401(k) is subject to ordinary income taxes, and for workers under age 59 1/2, there is a 10 percent tax penalty as well.

Cashing out has long been most common among workers with small balances, and it remains so, the survey found. Some 87 percent of workers with accounts of less than $5,000 opted to take cash, as did nearly three-quarters of those with balances between $5,000 and $10,000. But even as balances approached $50,000 the survey found one in five workers taking the cash, and even among accounts of $80,000 to $89,000 some 10 percent of job changers cashed out.

< SNIP >

And savers shouldn’t feel smug. If the number of people without adequate retirement resources gets large enough, those folks will likely play “what’s mine’s mine and what’s yours is ours” at the ballot box.

[Cool Guy]

And savers shouldn’t feel smug. If the number of people without adequate retirement resources gets large enough, those folks will likely play “what’s mine’s mine and what’s yours is ours” at the ballot box.

BUMP!

[Support Free Republic]

-->Click

[Ff--150]

And savers shouldn't feel smug. If the number of people without adequate retirement resources gets large enough, those folks will likely play "what's mine's mine and what's yours is ours" at the ballot box.

This author's read Rich Dad, Poor Dad by Kiyosaki! Invest in real estate... .

[Prodigal Son]

If the number of people without adequate retirement resources gets large enough, those folks will likely play “what’s mine’s mine and what’s yours is ours” at the ballot box.

Yep. It would be nice to have a constitutional ammendment against socialism to help ward off that kind of thing.

[goody2shooz]

I cashed out my 401k when I was laid off. The company kept trying to persuade me to leave it, claiming it would grow. Many of my former coworkers did leave theirs intact - a poor decision. The company was later bought by Enron and those workers lost everything they had invested in their 401ks. One man I knew lost more than a million dollars he'd accumulated over 42 years of saving. Very sad.

[chicagolady]

Yeah, folks are not gonna have their Social Security they worked for all their lives either ! Bush is gonna use it to fund Illegal Aliens.


Immigration Issue Centers : Illegal Immigration

Social Security Funds for Illegal Aliens?



“Adding millions of lawbreakers to the Social Security system would be a slap in the face to our retirees. Why should we bend over backwards for those who broke our laws to work in this country while shortchanging the needs of hardworking Americans and legal immigrants who have put money into the Social Security system for decades? With Social Security in financial trouble, it is totally insane even to think about adding millions and millions of alien lawbreakers into the system. Congress must act now to pass H.R. 1631 and keep this travesty from happening."
— Rep. Dana Rohrabacher (R-CA) [1]


With Social Security facing projections of insolvency, a Bush Administration plan would hasten that crisis by sending hundreds of millions of dollars in Social Security payments to Mexican citizens living in Mexico—including those who have worked illegally in the United States.

Under current law, an alien who worked illegally in the U.S. can only become eligible for Social Security benefits by becoming a legal U.S. resident. But officials at the State Department and Social Security Administration (SSA) are preparing a plan that would pay benefits to illegal aliens who have returned to Mexico.


The Bush Administration is negotiating an agreement with Mexico that Mexico has been seeking since the first such agreements were concluded more than twenty years ago. It would gain greater U.S. Social Security benefits for Mexicans who have worked in the United States, including those who worked illegally, and for their family members.[2] The agreement has not been signed yet, but the idea has already raised a firestorm of concern that may forestall it. If it were signed, it would be submitted to Congress, which would then have 60 days for either house to reject it, or it automatically would go into effect as an executive agreement.

A totalization agreement totals together periods of work by an individual in two countries, when calculating eligibility to receive benefits. The agreements are designed to ensure that people from one country working for years in another one do not fall through the cracks and end up ineligible for benefits in either country.

The U.S. has twenty such treaties with other counties, nearly all with European countries with economies similar to the U.S.’s and limited numbers of beneficiaries (2,084 in the case of the U.K.). The one proposed with Mexico would be dramatically different—not only because far larger numbers of people would be affected, but also because there are so many Mexicans who work illegally in the United States who might benefit from it.

The Mexican agreement would apply to all Mexicans who worked in the United States for a minimum of six quarters (one-and-a-half years of full-time employment) but less than 40 quarters (the amount needed to qualify for Social Security benefits without an agreement). To receive benefits in the United States, the Mexicans would have to become legal residents, but that requirement would not apply if they applied for Social Security benefits from Mexico (i.e., former illegal aliens could apply for Social Security).

The annual cost to the U.S. of the 20 existing accords is about $183 million; the agreement with Mexico is expected to cost Social Security between $78 million at first, rising to $650 million—in the SSA estimate—and more likely many times that in the view of the General Accounting Office.



GAO Tells Congress a Mexican Agreement Could Impact the Trust Fund

While the Social Security Administration (SSA) estimated that an agreement with Mexico would not make a measurable impact on the Social Security trust fund if it applied to 50,000 Mexicans — the number of current Mexican SSA beneficiaries residing in Mexico — and if that number increased to 300,000 beneficiaries by 2050[3], the General Accounting Office (GAO) disagrees.



In testimony on September 11, 2003, the GAO challenged the SSA’s methodology for estimating the costs of an agreement with Mexico. The methodology failed to take into account the estimated five million illegal alien Mexican workers in the United States, Mexicans now living in Mexico who earlier worked illegally in the United States, the fact that the agreement likely would make family members living in Mexico eligible for benefits that they are not currently entitled to, and the effects of a proposed new guest worker agreement. Also, the GAO found that there was no effort to systematically study the record keeping of the Mexican authorities who would be partners in the program to assure the validity of information received from that source.


The GAO dismissed the validity of comparing the impact of an agreement with Mexico to the one with Canada, because of the disproportionate number of illegal alien workers from Mexico. It also noted, “The cost estimate also inherently assumes that the behavior of Mexican citizens would not change after a totalization agreement goes into effect. Under totalization, unauthorized workers could have an additional incentive to enter the United States to work and to maintain the appropriate documentation necessary to claim their earnings under a false identity.”


Given the questionable methodology used by the SSA to assess the impact of an agreement with Mexico, the GAO concluded that the SSA’s assessment that such an agreement would not have a measurable impact on the trust fund was not supported by the analysis, and, “Thus, for the Mexican agreement, additional analyses to assess risks and costs may be called for.”

[Revelation 911]

and for workers under age 59 1/2, there is a 10 percent tax penalty as well.

thats hardly a painful incentive to keep it there when there is a new plasma tv calling thier name (sarcasm)

frankly I'd prefer the option to invest in a program of my own choosing - but alas - that would give the sheep too much power

[palmer]

The company was later bought by Enron and those workers lost everything they had invested in their 401ks.

Is that a fact? My impression was the only way to lose everything was to choose Enron stock as the sole investment. Rather than factors beyond their control, the problem was people putting all their eggs in one basket.

[proxy_user]

And many of the Enron workers who put ALL their 401K money in Enron stock knew some of what was going on there. They participated in setting up phony trading floors, helped create complicated financial structures, etc, etc, and still invested. It really makes you wonder....

[FreeManWhoCan]

When I left my last job, I left for two reasons
1) Not happy
2) I wanted to free up my 401K.

Before I left I created my own 401K account with Datek and then had the funds transferred directly; thus avoiding those deadly taxes. I have been investing my 401 for around 9 months now and have brought it up 30%; more than what my last job was doing with it. I don't read the Wall Street Journal. All I use is Yahoo and Datek. I realized after years of studying the market and the news sources that no one new what they were talking about.

[MarkL]

frankly I'd prefer the option to invest in a program of my own choosing - but alas - that would give the sheep too much power

Actually, they're talking about a 401K program, which means you DO have control over how it's invested. Sure, there are things you can't invest in into, but if there's another tax defered account or investment you want to use, you can.

I'm in the process of trying to roll-over my 401K from one company to another, but I may have to leave it for another 4 years. Most companies who set up 401K plans have a surrender charge if you're going to take the money out before a set time has passed. In my case, that's 10 years. So, if I roll it over to another tax deferred plan, I will get hit with a 10% charge, but I have no other tax liabilities. If I leave it there for another 4 years, it will cost me nothing. OTOH, if I were to try to take the cash now, I'd pay my current tax rate (and I would assume the same for state taxes), a 10% penalty to the IRS (and maybe some to the state?), and then the 10% surrender charge. THAT'S EXPENSIVE! It would actually be cheaper to take out a loan of some sort, and pay the interest.

Mark

[goody2shooz]

Enron's 401(k)s were heavily weighted with their own stock. I was shocked to find that out later.

[palmer]

Their 401k matching contributions were in Enron stock just like most other companies. Employees were prohibited from selling those matching contributions essentially until after retirement. But some employees chose to put their own contributions into company stock. That's just stupid.