Downside to a Strong Job Market: Cashing Out 401(k)s Early

Thanks to a strong economy and a 17-year high in the employee quit rate, record numbers of U.S. workers are leaving their jobs voluntarily to seek greener pastures with new employers. While most will exit amicably, many are burning their bridges in a potentially more dangerous way—they’re cashing out their 401(k)s when they leave.

About 50 percent of workers ages 20 to 29 who left a job cashed out their defined contribution plans on the way out, according to the upcoming Alight Solutions' 2017 Universe Benchmark report.

But it's not just the millennials: More than four in 10 employees in their 30s and 40s who were laid off, quit or found new work took the cash instead of keeping the money where it was, or rolling it over into their new employer's retirement plan or an IRA.

HB clients, Blake Christian, CPA and James Nevers, CFP® were interviewed in the national media this week about the dangers of cashing out retirement accounts early and offered smarter alternatives.

According to Christian, a partner at Long Beach, CA-based HCVT: It is fairly common for employees to cash-out smaller 401(k) accounts when they switch jobs--a mistake they’ll regret at tax time the following April. “That’s when they realize they are not only paying federal and state tax on the 401(k) funds they cashed out, but they’re are also subject to a 10-percent federal ‘early withdrawal penalty’ plus a state penalty if they are under age 59-1/2 at the time of withdrawal.“

It’s not uncommon for 50 percent of the funds (or more) to get “vaporized by taxes and penalties” said Christian, adding that by that time, “the employee has likely blown the money on a new jet ski or other toy.”

Nevers, an advisor at Soundmark Wealth Management in Kirkland, WA agreed: “When you are between jobs, especially early in your career, that old 401(k) starts to look like a tempting pile of cash you can use for a vacation or to relax for an extra month or two between jobs. The problem is that the $10,000 in your old 401(k) isn’t really the same as $10,000 in your pocket (after taxes).”

Let’s say you are 40 years old and in a 25 percent tax bracket. Since you’re under age 59 ½, withdrawing that $10,000 early will leave you with only $6,500 after taxes. Even worse, explained Nevers, is that you “just hit the re-set button” on your retirement savings. “Remember, retirement savings are for retirement. Only save for retirement after you have set up an emergency fund that can cover your living expenses for three to six months, or for as long as you might expect to be out of work. This will help you keep your retirement funds where they belong, added Nevers.

According to Christian, by leaving the funds with your former employer, the 401(k) fees are generally low and investment choices are often broad.  “You can also roll the 401(k) amounts into an IRA and continue earning tax-deferred retirement savings. If you are expecting to be in a relatively low tax bracket the year you leave your current employer, ask your tax preparer or financial advisor about the possibility of rolling the funds into a Roth IRA. This trigger taxable income (but no penalties), and the Roth IRA can build up TAX FREE after five years and make this pool of money extremely valuable when you retire,” added Christian.

Retirement may seem far away, but time is a powerful factor to have on your side when it comes to retirement savings, said Nevers. “Albert Einstein called compound interest the eighth wonder of the world. It’s even more powerful when it’s inside of your 401(k).”

Conclusion

The key takeaway from our experts is that everyone from young adults to near-retirees can benefit from a little delayed gratification. “Instead of having a little fun today and cashing out your old 401(k), keep it saved,” said Nevers. “You’ll be thanking yourself down the road. Early in your career, you may only have a few thousand dollars saved up in your retirement accounts. It may not seem like much, but thanks to the power of compound interest and the many working years you have until retirement, your accounts have the potential to grow and grow.”

TAGS:  Alight, cashing out 401(k) early, Blake Christian, James Nevers, compound interest, early withdrawal penalty

Step Away from Your Desk. Take a Break from Your Screen(s)

Like most teenage boys, my sons are on their devices pretty much all the time. As card carrying members of GenZ, they watch TV on their phones. They game (a lot) on their consoles. They’ve learned everything from the correct way to tie a bow-tie to building a drone from scratch via YouTube and eHow.

In short, they grew up with tech. Their devices are like appendages and 24/7 tech is part of their DNA.

While both boys (age 15 and 19) play competitive soccer, baseball, and other sports and seem to plenty of friends, they wouldn’t think twice about spending a beautiful summer day, holed up in the basement by themselves playing Fortnight for hours on end subsisting on pizza bagels, popcorn and juice boxes. If you have teenage sons or grandsons, you know what I mean.

That being said, my 15 year old spent four weeks unplugged from technology this summer. He spent three weeks at a sports camp in Maine living in a tent--a camp with a NO-ELECTRONICS policy. That was followed by a weeklong family reunion at a fishing cottage in remote western Michigan….spotty internet service at best.

Sure, he resumed his digital life the minute he returned home. But, he’s toughened up a little, both mentally and physically, and is showing a few glimmers of maturity sprinkled in with the teen slang, mood swings and snarky comments.

If he can take a tech break, so can you.

Whether gaming or working, research shows that sitting for hours without moving can slow the flow of blood to our brains, and that can have implications for your long-term brain health and productivity. But research shows that standing up and strolling away from your desk for just two minutes every half-hour seems to stave off this decline in brain blood flow and may even increase it.

So, ignore the angry stares of your colleagues, supervisors and clients. Get up from your desk at least once an hour to clear your head and recharge your battery. For more, see Why Sitting May Be Bad for Your Brain.

Your brain tricks you into doing less important tasks

As Tim Herrera explained recently in The New York Times, thanks to the urgency effect, our brains tend to prioritize immediate satisfaction over long-term rewards. Citing a Journal of Consumer Research study, Herrera wrote that we’re more likely to perform “smaller-but-urgent tasks that have a deadline” than to perform more important tasks that don’t have an immediate deadline. This is true “even if the outcome of the smaller task was objectively worse than that of the larger one,” added Herrera. He suggests setting your computer or phone to beep at you every half-hour and get up, stroll down the hall, take the stairs to visit a restroom a floor above or below your own, or complete a few easy laps around your office.

Our take: That’s not slacking off. That’s being more productive and creating better value for your clients, firm and colleagues. 

At our firm, we have a policy of “rough draft in the morning, final draft before you go home.” That means, you never turn in assignments or client work in the morning unless (a) you are 100-percent on you’re A-Game, (b) have double and triple checked your work and (c) have stepped away from your desk for a least an hour beforehand.

I routinely take 90-minute lunch breaks to train for triathlons, run errands and make doctor’s appointments. So do most of my colleagues. No checking email, text messages, or voicemails.

I can’t tell you how many times what looked so brilliant before my “decadent” lunch break, looked like crap upon my return. “Thank God I didn’t turn that piece of crap in,” I’ve told myself hundreds, if not thousands of times. And we’ve never lost a client because we were unreachable or unaccountable.

“Avoid being on the grid 24-7,” advised Anat Lechner,  an NYU Stern School of Business  professor in a recent NY Times interview. “Carve out for yourself the three or four hours that you need every day to get off the grid and relax and teach the rest of the world, as well as yourself, that not all hours are email hours.”

Conclusion

Our take: While some of you are at the mercy or bosses, clients and HR directors who still place a premium on facetime, if you have 90 minutes away from your desk and come back 3x more productive, isn’t that a positive ROI on your human capital?

You can’t get that kind of ROI when you’re constantly connected to the grid.

For more on this topic, see our related posts Time to Take a Break from Technology and Too Many Gadgets, Too Little Time.

TAGS:  Digital detox, walk away from your desk, take a break from tech, digital distraction, work life balance, Fortnite addiction

Advisors: 4 Keys to Getting More (and Better) Media Attention

Our recent post (HB Clients Featured in Philly Inquirer, Advisor News and Accounting Today) generated higher than normal feedback, so we thought we’d do a follow-up. In a highly competitive business in which most of your work, establishing yourself as a thought leader is one of the best ways to separate yourself from the pack.

According to the Wealth Advisor Confidence Survey™ that we conducted in conjunction with The Financial Awareness Foundation, getting mentioned in the press is one of the most effective thought leadership tactics advisors can use today. In fact, “Being quoted in the press” ranked #4 out of 15 tactics surveyed and #3 among firms expecting double-digit growth in 2018. Full rankings here.

“A mention is most valuable when it is in a media outlet that your existing or potential clients follow regularly,” said Rich Chernela, a veteran financial media relations professional who will be joining our firm this fall. “A mention in an outlet that is not followed will only have value if you leverage it.”

Also consider media outlets that your clients’ spouse or adult children follow. Case in point: Our client James Nevers (Soundmark Wealth) shared his thoughts about planned giving yesterday in the Self Magazine financial planning guide (What Financial Planners Want You to Know Before You Donate to Charity).

According to Chernela, media mention “is not an end in and of itself; it is a part of building your brand and establishing yourself as a thought leader.” He suggested four ways to leverage your media hits, whether a simple quote or a feature-length interview:

1. Share it. Post a link on your web site and send an email to your contacts with a link to the article and include additional comments, expanding on your mention.
   
   
2. Incorporate your mention in a blog. If you were quoted in an article, chances are much of what you said to the journalist who wrote the story did not appear.  Incorporate the comments left on the cutting room floor into your blog post.
   
   
3. Use social media. LinkedIn, Facebook and Twitter are useful social media platforms to broadcast your media mention to a wide audience. Note that many journalists follow social media and may pick up your mention and further comments in your post for own their stories.
   
   
4. Cite your media mentions when you are meeting with prospective clients. They validate that you are a leader in your profession.

Conclusion

Attracting media attention is not too difficult for most of you. The challenge is getting featured in the right outlets and doing more with the media attention that you DO receive. Contact us any time if you’d like to discuss media training and PR outreach strategies to build our personal brand.

TAGS:  Rich Chernela, Wealth Advisor Confidence Survey, Financial Awareness Foundation, Self.com, James Nevers, Soundmark Wealth, media coverage, media training