Auto portability prevents retirement funds from withdrawing
In old age, the top priority is to stay independent and healthy enough to lead an independent life. So what is the financial way to go about this? Over the years, most of us have
Think about retirement plans.
make financial mistakes that we recover from. But here we want to talk about a big mistake many people make that has a lasting impact: spending money from their retirement accounts before they retire.
Sometimes, as we all know, life happens, hardship comes, and you have to deal with it as best you can. Last year, Congress passed the CARES bill with a provision that would allow people to withdraw up to $ 100,000 from their 401 (k) savings without the usual penalties. An unusual move that was allowed because of the pandemic and shutdown.
But we’re here to talk about the times when we don’t actually “need” to pull money out of a retirement account. And we still do. Why? Because we don’t really understand what hit we’re going to get from it.
Often times, people choose to empty their retirement accounts when they leave or change jobs. Oh, that seems like a good idea back then. There are many things they can use the money on – paying off debt, for example, and another particularly popular one is paying for an upcoming adult child’s wedding. For example, my friend Ben spent his retirement savings on his daughter’s wedding. After withdrawing the money, he unfortunately found that he had to pay income tax on the amount collected – plus a 10% early repayment penalty, as he was not quite 59½ years old.
Maine Senator Susan Collins knows firsthand that she is making a rash decision to top up her retirement plan. As chairman of the Senate Special Committee on Aging, she said in a 2019 hearing, “The worst financial decision I have ever made was leaving Hill as an employee with nearly 12 years of pension contributions. I took all the money out to buy a car … I swear if only one had said to me … ‘Do you really want to do this? They are already securitized and the impact is huge and there is nothing wrong with getting a car loan. ‘ … It was really such a bad decision. “
People are robbing their future selves of thousands of dollars in retirement plans that they would have had if they had left the money invested – or, if they had changed jobs, moved the money into their new employer’s savings plan. This is especially true for people who change jobs frequently and pay off more than once.
Fortunately, there is a better solution for job changers who may have made this mistake in the past. It’s called Auto Portability – a technology-based solution developed by Retirement Clearinghouse. A fairly new retirement plan that ensures that if you change jobs (which 14.8 million workers do annually), your 401 (k) savings are automatically transferred from the previous employer’s plan to the new employer’s plan – even if their assets is less than $ 5,000. This allows your savings to grow further in an easy-to-monitor, consolidated investment account.
Studies show that 40 year auto portability could reduce payouts so much that it could add $ 1.5 to $ 2 trillion to Americans’ retirement savings.
And much of that savings will belong to the people who need them most. Without auto portability, 50% of workers who earn between $ 20,000 and $ 30,000 will cash out on job changes within a year. 63 percent of blacks and 57 percent of Hispanic workers do the same. Forty-one percent of women do this. And 71% of women between the ages of 25 and 34 do this. But auto portability is changing that. The financially weaker demographics – those with the smaller balances – will lower their payout rates more than other groups if auto portability is a feature of the plans.
The ultimate goal, of course, is that we are all informed about how we can financially prepare for retirement – rather than just counting on the system to make wise decisions for us. With that in mind, here is everyone who has access to the information they need to learn in retirement. Find out the best age to get social security benefits. And here is a link that has a calculator that shows how much savings could grow if invested wisely – including by not paying out any payouts when changing jobs.