The RetireMentors

Retirement advice from experts in the business

Oct. 5, 2016, 11:42 a.m. EDT

How you should observe 'National Save for Retirement’ week

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By Spencer Williams

About Spencer

J. Spencer Williams is president and CEO of Retirement Clearinghouse where he applies more than 25 years of experience in starting, building and leading businesses in the financial services industry. Under his leadership, Retirement Clearinghouse introduced new industry best practices, been recognized for innovation and improved the operations of thousands of retirement plans. Follow Spencer on Linkedin and read his company blog.

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National Save for Retirement Week, also known as National Retirement Security Week, will be held this year from Oct. 16-22. While most people naturally think of "save" in the context of contributing more money into an account, as a professional in the retirement services industry, my word-association result is different. When I hear the word "save," I think of rescuing someone from a bad decision or situation. When it comes to retirement, the worst decision you can make is not to participate in a defined contribution plan, and the second-worst decision is to prematurely cash out your 401(k) account at the point of changing jobs — and as we come closer to another National Save for Retirement Week, it's helpful to review how you can avoid the cash-out pitfall.

According to Fidelity Investments, a hypothetical 30-year-old employee who cashes out a $16,000 401(k) account today could lose more than $145,000 in retirement income. To further demonstrate how destructive cash outs can be to your retirement savings, Aon Hewitt found that a hypothetical worker who cashes out three times during their working life cuts their total retirement savings from over six times pay to 1.25 times pay.

But that's not all. Cashing out hits you in your wallet twice — once when you actually cash out (when your savings balance takes a hit from early withdrawal fees), and a second time on tax day.

No wonder a Boston Research Technologies study of mobile workforce behaviors published last year found that 53% of baby boomers who have cashed out once or more during their working lives regret their decision.

Fortunately, the best decision you can make is already available — rolling your retirement-savings balance into your current-employer plan as you switch jobs. By routinely consolidating your savings in your current-employer plan as you move from job to job, roll-ins help you avoid the temptation to cash out (as well as the costly option to leave your account behind in your previous-employer plan) at the point of job-change.

Consistent plan participation helps you save more

The Boston Research Technologies study of mobile workforce behaviors found that workers with at least $25,000 in retirement savings were less likely to cash out than those who had saved less. This finding inspired my advice to members of the Class of 2016 to "Strive for 25." According to the study, 40.9% of Americans with household retirement savings of under $25,000 had chosen to cash out at least once, compared to 31.8% of their counterparts with between $25,000 and $75,000 in savings.

One reason for this trend is that plan sponsors, record-keepers and financial advisors are more likely to proactively offer guidance and support to holders of retirement savings accounts with balances of $25,000 or more. And no retirement services professional worth their salt would seriously advise you to cash out. Furthermore, those who have accumulated $25,000 in retirement savings have also likely already developed a habit to roll in instead of cash out when switching jobs.

This type of habit forming is critical to your success in saving for retirement. A recent study jointly compiled by the Employee Benefit Research Institute (EBRI) and Investment Company Institute (ICI), titled “ What Does Consistent Participation in 401(k) Plans Generate? Changes in 401(k) Account Balances, 2010-2014 ,” demonstrates the significant impact that uninterrupted plan participation can have on your retirement savings.

The study found that at the end 2014, the median account balance for the 8.8 million 401(k) plan participants in the EBRI/ICI 401(k) database who received steady plan contributions from 2010-2014 was more than three times the median account balance for all 24.9 million participants in the database.

Another important finding in the EBRI/ICI study highlighted the fact that job tenure for "consistent" participants was significantly higher than the job tenure for all participants. Multiple studies have demonstrated that high cash-out rates occur as participants change jobs. If you roll your balance forward as you change jobs, you bridge the tenure gap and create what I call "synthetic tenure" — unbroken, continuous participation in a qualified plan throughout your working life.

Remember this when National Save for Retirement Week begins on Oct. 16 — and all year. Cashing out is a huge blunder that will seriously compromise your ability to achieve a financially secure retirement. You'll save more for retirement simply by never cashing out and always keeping your savings invested in a defined contribution plan — and you'll accomplish this goal by completing a roll-in whenever you change jobs.

Spencer Williams is President and CEO of portability solutions provider .

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