by Jesse Anderson, CFA®
Last weekend a long-time friend said to me:
“I cashed out my entire 401(k) before the tech bubble, and Thank God!, because I would have lost everything.”
My friend is so proud of his decision that he’s still bragging about it over 10 years later. I did not have the heart to tell him that his decision to cash out will most likely cause significant damage to his retirement. The good news, at least for the rest of us, is that we can learn from his mistakes. During our conversation, I got the full picture of what all he got wrong:
– He let his emotions get involved. What may have seemed like a good decision 10 years ago will most likely continue to harm him the rest of his life. When he starts living off his portfolio in retirement, he may be scrambling to find enough funds to meet his expenses.
– He took the money. Unfortunately, he didn’t just move the funds to cash; he withdrew everything, incurring both penalties and taxes and ruining the advantages of a tax-deferred account.
– He stopped saving. There are two critical pieces to funding retirement: saving and investing. It is an absolute must for pre-retirees to make contributions each and every year.
– He missed out on his company match. Although not always the case, most companies will match contributions in the range of 3-6%. These are free dollars you receive only if you contribute to your account.
My guess is that he would not have lost everything. Even in more recent difficult years like 2008, very few people saw their entire 401(k) wiped out. Only the unfortunate people who invested in company stock and worked for companies like Lehman Brothers would have experienced such a tragedy, which is exactly why we recommend against buying company stock in your 401(k).
As an investment advisor, I hear these types of stories all the time. Many people view their investment decisions as wise, yet have no idea of the real ramifications. Investing has to be viewed as a long-term process. Along the way, you must be willing to accept both highs and lows.
You might think my friend’s story is a rarity, but I assure you, it’s a lot more common than you can imagine. It is never too late to take the necessary steps to get your retirement back on track. I hope you can learn from my friend and avoid making the same mistakes.