In this video, Johnathan Rankin, the founder of Theorem Wealth Management, discusses a critical mistake that could be costing millions of Americans their retirement security. With almost 50 million people switching jobs last year, a staggering 41.4% of U.S. workers withdraw money from their 401(k)s when they leave their jobs, and 85% of those people cash out the entire account. 😱

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Last year almost 50 million people switched jobs which means that if trends stay the same, then millions of people might be making a horrible decision that could end up hurting their retirement. Now, I recently read a study that revealed a shocking number of Americans withdraw money from their 401(k)s when they leave their jobs. The study, conducted by the UBC Sauder School of Business, found that 41.4% of U.S. workers do this, and 85% of those people cash out the whole account.

Hey everybody I’m  Johnathan Rankin, the founder of Theorem Wealth Management. If you're new here, make sure you subscribe to our channel so you don't miss any of our retirement planning videos. And if you've been following us for a while, welcome back! Today we are talking about the impact of cashing out your retirement account and what your options are when you change jobs.

When I saw the results of this study, I have to be honest, I wasn’t shocked. I have been working with retirement focused investors for going on 2 decades and I have seen this happen more often than not. It typically happens when someone doesn’t think that a certain amount of money will make a significant impact on their long term retirement. It is easy to ignore the future when you just change jobs. You’re just starting a new job, so the last thing you’re probably thinking about is when you are going to be quitting and retiring from that new job. That makes sense. It also makes sense that when you receive a standard form letter in the mail and it gives you a list of options of what you can do with your account, seeing a lump sum that can go right into your bank account can be hard to pass up. You’re focused on the now and what can that money do for your now.

But as an advisor who has seen the damaging effects of cashing out a 401(k), I can tell you that it is very important to continue to focus on the future. Let’s look at an example of the impact cashing out a 401(k) can have. In this example, we are looking at John, a 30 year old who just started a new job where he will be earning 80k per year. John had accumulated $30,000 in his previous employers 401(k) and plans to contribute 10% of his salary to the 401(k) at his new job where his employer will match half of that. Assuming John retires at age 65, John’s assets will last until he is 87 years old. But what happens if John were to cash out that 30,000? Think about it from John’s perspective. He knows that retirement is decades away and in his mind 30000 won’t cover even a years worth of living expenses.  By cashing that out, John’s assets will now only last until age 78 resulting in John losing 9 years! Most people look at things in a dollars and cents perspective. But when you think about it in terms of time, that is what really matters. He lost 9 years of retirement funding.

But let’s fast forward 10 years. Assume John is now 40 and still would like to retire at 65. In this scenario, John’s 401(k) has continued to grow and is now at $100,000. If John would have just stayed consistent, he would have had over 1.1 million dollars when he retires, and his assets would have lasted until he is 82. If john were to cash out that 100,000 and retire at 65, his assets would only support him for 4 years. Meaning that retiring at 65 would no longer be an option. This is just a high level overview showing the impact cashing out a 401k could have. there are many other factors that go into projections like this and we are just scratching the surface. Even in that second example, where John is 40. It is easy to see how the thought of retirement 25 years away could seem like a lifetime especially when the primary focus when changing jobs is the now. But cashing out your retirement, no matter what the balance is or what your age is, will have an impact on your retirement one way or another. So instead of thinking about the dollar value of what you are cashing out, think about the years you might be taking away from your retirement.

When you change jobs, you have 4 main options when it comes to your 401k.

When you leave your current employer, you have four main options when it comes to your 401k:

Leave it with your old employer

Roll it over to your new employer

Roll it over to an Individual Retirement Account (IRA)

And as mentioned earlier, Cash it out

So let’s dive into each one of them as well as the pros and cons so you can make the best decision for your financial future.

Option 1: Leave it with your old employer

if your account balance is over $5,000, you can choose to keep your 401k where it is with your previous employer. Leaving your 401k with your old employer is the easiest option because you don’t have to do anything, but not always the best one. This may be a good choice if you're satisfied with the investment options and fees associated with the plan. However, there are a few potential downsides: most 401ks Limited investment options, you could also face Potentially higher fees now that you are no longer with the company and for many people it can be difficult managing multiple 401k accounts. Trying to remember logins, aligning your asset allocation across different accounts and just remembering to keep track of it can be difficult.

Now, let's look at the second option.

[OPTION 2: Roll it over to your new employer]

Rolling your 401k into your new employer's plan can be a great option if you're starting a new job with a company that offers a 401k plan. With this option, you get to manage your retirement savings more efficiently with everything being consolidated into one account You also continue the tax-deferred growth, and with an established balance, you give yourself potential for loan provisions. However, you'll want to consider the investment options and fees associated with the new plan before deciding on whether or not you should roll over your 401k into your new employer plan.

On to the third option!

[OPTION 3: Roll it over to an Individual Retirement Account (IRA)]

Rolling your 401k into an IRA is another popular option. An IRA offers more investment options than a 401k and it allows you to work with a professional advisor to help you manage your retirement savings. Before rolling your 401k into an IRA, you’ll want to understand the fees associated with the IRA.

And finally, let's discuss the fourth option which we talked about in the very beginning.

OPTION 4: Cashing Out Your 401K

As mentioned, you could cash out your 401k when you leave your employer. This should really be considered a last resort. Not only will that have a negative impact on your retirement, cashing out your 401k early can result in significant taxes and penalties, which could cost you a sizable portion of your account balance.

Alright, so we've gone through the four main options for your 401k when you leave your job. Now, let's talk about a few key factors to keep in mind when deciding what's best for your financial journey.

Investment Options and Fees: You’ll want to check out the investment choices and fees tied to each option. You want to make sure you have solid mix of investments and competitive fees to make the most of your retirement savings.

Financial Goals: Think about your short-term and long-term financial goals and how each option can help you best achieve those goals.

Tax Implications: Make sure you understand any potential tax consequences for each option. This really is a factor if you are considering cashing out your account.

Access to Funds: If you think you'll need to tap into your retirement savings before you retire, consider options that allow loans or penalty-free withdrawals.

Ease of Management: Think about how simple it'll be to manage your retirement savings with each option. Streamlining your accounts or working with a financial advisor can make investing a lot easier.

So, there you go—a complete guide to help you navigate your 401k options when you leave your employer. My hope is that you think about the long term impact your decision can have on your retirement. If you need help and don’t know which option is best for you, please use the link in the description below and a member of our firm will be happy to help.

As always, thanks for watching! If this video was helpful, make sure you subscribe to the channel for more ways you can maximize your retirement. And if you are thinking about retiring soon, make sure you check out the video coming up next on why you shouldn’t retire, even if you can afford it. I’ll see you there.

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