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Savers can savor long-term payoffs

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Wednesday, Feb. 19, 2014, 11:15 p.m.

One way the world is divided is between savers and spenders. Everybody seems to be one or the other.

A saver can be moved to spring loose at times. And a spender might resolve to save a little. But it's hard to go against nature. And backsliding is so easy.

It turns out a lot of working people with 401(k) retirement plans are cashing them out early.

A natural saver wouldn't do it. He or she would struggle first, take a second job, do vacations at home, anything to avoid cracking that nest egg. A spender can't see what satisfaction there could be in putting money away.

The implications for policy are huge.

Politicians find it much easier to appeal to the spending side. “I will do this, that and the other,” they say. Almost no office-seeker dares to campaign by promising less. Make a priority of balancing the budget? Ho-hum.

After years of stimulating spending — its own and the people's — the government, perhaps bankruptcy-bound, has taken to promoting thrift, the people's, not its own.

Trouble is, the proposed My Retirement Account (myRA) touted by President Obama, despite some good features (payroll savings, non-taxable gains) can only be invested one way: a dull, low-return way. In a government bond fund. And it's for workers who generally don't take part in a 401(k) plan.

Yet some people in a 401(k), which is much better, are getting out.

And that's despite the huge advantage of tax-deferral.

They owe no income tax on the money put in, only in the future when taking it out, nicely grown by then. Many employers sweeten the pot further with a percentage “match.”

Nevertheless, last year, 35 percent of 401(k) holders cashed out when they left a job. In 2009, a tougher year, just 32 percent gave it up.

What they should have done is let their 401(k) keep growing at the old employer. Or move it to a new job. Or roll it over to another tax-deferred retirement vehicle.

Cashing out triggers an immediate 10 percent tax penalty if you're younger than 5912. Plus, the income tax on whatever profits have built up.

Out of an average cashed-out balance last year was almost $16,000, the double tax rake-off left only $11,200.

And the lost chance for as much as $500 a month extra retirement income from compound interest alone on the $16,000. What a shame.

It's not true that the Great Recession “devastated” 401(k) accounts held in stock mutual funds.

They did sink with the stock market but in general they've bounced all the way back and more.

At the end of 2013's strong market, average 401(k) balances stood at or near records. For example, $101,650 and $89,300 respectively at Vanguard and Fidelity, two of the largest 401(k) managers.

You've got to be a saver to savor such long-term payoffs, however. Government could help.

It could quit piling up debt and risk cheapening the dollars that thrifty folks put away.

But how to make such politics exciting?

Jack Markowitz is a columnist for Trib Total media. Email



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