In my mid 30’s, I began having a small percentage of my paycheck taken out and put into a 401K retirement savings account. I knew that Social Security would not be enough to sustain the wife and I when we reached retirement age and I wasn’t sure how much of a pension I would get from the utility I was working for at the time.
In time, that 401K reached a value of $58,000 and climbing, until the economy began to turn, thanks to some of the policies of Bill Clinton. Most 401K retirement accounts are linked to the Stock Market, US Bonds and mutual funds, but they all began to decline.
If you recall, Clinton forced the mortgage companies to come up with ways to put more people into homes and it seemed to work, at first. However, a couple of years after Clinton left office, millions of people discovered that they could not afford the payments on those creative mortgages. After 3-5 years, their mortgage payments began to increase to the point they couldn’t afford the payments.
Consequently, millions of homes ended up in foreclosure and many of them also filed for bankruptcy. This led to the collapse of the housing industry which took the rest of the nation’s economy with it. This resulted in the loss of many jobs as businesses cut back and some closed their doors.
Then one day on the way home from work, a teenager lost control of her car and hit us on the interstate. It totaled our minivan and left both my wife and I with some permanent injuries. Our insurance company barely gave us enough to pay off the wrecked minivan, which left us with no vehicle and no money to buy another.
We did file a lawsuit against the teenager, but Kentucky is a no-fault state and since police did NOT cite her (she claimed she was clipped by another vehicle although a number of witnesses disputed that claim) we had a difficult time collecting. The county we live in is also very conservative and no jury over the prior 2 years, awarded anyone a penny more than their outstanding medical. No future medical and nothing for pain, suffering or future medical. By the time we paid the attorney and our outstanding medical bills we had very little to use to buy another vehicle.
Due to poor money management and helping our daughters, our credit score was low, which meant that trying to buy a new vehicle meant payments of over $400 a month, which we could not afford, we had no alternative to cash in my 401K. By that time, what once was valued at $58,000 was now only worth $28,000.
Since I wasn’t retirement age, we had to pay a 10% penalty when we filed our federal income tax that year. We were able to purchase a vehicle, paying cash, but as soon as we drove it away from the dealer, our $24,000 investment in our vehicle instantly dropped to closer to $15,000, a loss of over 37%, not a wise financial move.
Additionally, now that we are retired, we don’t have that retirement account when we could really use it. Had we kept it, it would probably be worth over $60,000 to $70,00 and more had we continued to contribute, but we didn’t because we were then in our mid-50s.
Cashing in our 401K early actually penalized us in three different ways – the 10% tax penalty, the devaluation of a motor vehicle and no retirement account when needed.
So, please, take it from one who made the mistake – don’t cash out your 401K accounts early. It’s often a lose-lose-lose situation.