Two experts in the retirement consulting industry see millennials squandering their retirement savings by not being smart with their 401(k)s.
In a Marketwatch article, these two ladies identify two disturbing trends in the world of 401(k)s as the “biggest financial mistake millennials are making.”
A 401(k) is an account where you stash away savings for your retirement. These contributions are often removed your paycheck before taxes are taken out.
Taxes aren’t owed until the money is removed from the account, which is typically during retirement. Many companies offer matching contributions up to a certain percentage. Essentially, this is free money from your employer that most people would be insane to pass up.
Unlike previous generations who toiled at the same company for their whole working lives, millennials persistently switch jobs to pursue better opportunities and make more money. This is the new norm — millennials hopscotch around the job market, as changing jobs constantly has become a necessity to survive in the new economy.
But hopping around has had an unintended consequence, as there are now millions of people with orphan 401(k)s. As if changing jobs isn’t enough of a headache, there’s something that people are forgetting to transfer over to their new jobs — the retirement monies that are in their 401(k).
In many cases, people lose track entirely of their account at their old job, and their savings become lost in the melee of changing jobs.
When people switch jobs, if they remember their 401(k), many of them end up making another epic mistake when they cash in the balance. If you cash in your 401(k), not only does the amount you saved become taxable, but you also endanger your retirement.
Financial experts say taking the cash out of your 401(k) is a serious blunder because your small retirement savings can grow substantially over time. Because of compound interest, cashing in $3,600 today will potentially make you lose out on more than $30,000 by the time you retire.
Another mistake millennials are making with their 401(k)s involves not checking their retirement portfolio. Even if you’ve kept track of your 401(k) and haven’t irresponsibly cashed out the proceeds, you’ll need to monitor your investments.
That because a 401(k) isn’t a bank account. Instead, those monies are used to invest in stocks, bonds and money market investments in target-date funds. Those funds aggressively invest your savings if you’re far away from your target date or your retirement age.
As you approach retirement, the funds begin to act more conservatively to make sure you don’t lose your shirt right before you hit your golden years.
No one ever said being an adult in this job market is easy — and properly managing our 401(k)s is just another reason why adulting takes some extra effort sometimes.
The bottom line: when you switch jobs, take your 401(k) with you, resist the urge to cash in your retirement, and monitor your retirement investment portfolio every now and then.
A little effort now will be pivotal to enjoying your retirement.
This article was originally published at GenFKD.org.
Photo by 401(K) 2013
David is the Editor of Bold. He's especially passionate about millennial economic empowerment. A former local news reporter, David is originally from the Little Havana area in Miami, and later became a pioneer resident of the Disney-inspired town of Celebration, Florida. David holds a Master’s in Public Policy from the Harvard Kennedy School.