A recent study by Putnam Investments, “Retirement Savings in an Unsettled Economy,” found that 30% of investors, who faced a choice between cashing out the balance in their retirement plan or alternatives such as IRA rollovers, took the cash payment over other options.
The survey of 1,500 investors who have retirement accounts found that these investors unnecessarily pay $7.1 billion to $8.3 billion in federal taxes and penalties each year due to these early distributions. The percentage was particularly high in the group aged 18 to 34 with almost 40% choosing the cash out option.
This result is disturbing, since of the 44% of investors surveyed who said that either a 401(k) or individual retirement account (IRA) will be their most important source of income when they retire, 57% were in the 18 to 34 year age group.
In addition,78% of respondents said that retirement is their most important personal financial priority, and most believe that they will pay their way rather than rely on government or employer retirement plans.
This year, investors will withdraw approximately $33 billion to $39 billion in cash payments from their 401(k) plans, exposing the money to taxes and penalties and losing the opportunity of having their assets grow tax deferred until retirement, specifically:
- between 15% to 39.6% in federal taxes for early distributions from 401(k)s, and
- a 10% penalty if under age 55.
Not all news was bad. The study also found that, among those faced with the decision:
- 43% rolled over the money into an IRA;
- almost 19% left their money in a former employer’s plan; and
- one in 10 moved their balances into a new employer’s plan.
Respondents also reported feeling the decline in equity markets in the last year, seeing their 401(k) balances falling by an average of 6.3% to $41,900, and their IRA balances falling by and average of 9.7% to $53,100 due to investment losses.
When questioned how they would change their investment decisions of last year if the could go back in time, 37% of respondents were unsure. Among their other responses:
- a quarter of respondents said they would more aggressively attempt to rebalance their portfolios in view of changing market conditions;
- some 23% said that they would diversified more;
- one in five said that they would research their investment alternatives more thoroughly.