I want to take you back to the mid-2010s. America had recovered from the recession of 2008 and things started looking up. Where was I, you might ask? I had just started a new job! I was particularly excited because this job came with retirement benefits, something I had never had before. However, I didn’t know how to handle my retirement account properly. This led to a couple of serious mistakes.
My Major Financial Mistake
Now, the mid-2010s were somewhat prosperous times. The stock market had recovered and unemployment slowly started to decrease. However, I personally came into some hard times.
I made the decision to leave my job to attend seminary. To this day, I do not regret this decision. After all, I met my wife there! And I also still serve in ministry to this day.
However, I regret failing to make a proper financial plan. At the time, I knew little about making a monthly budget. I knew even less about how to handle my retirement account.
You see, I knew I had a 401(k) retirement account from my previous job. But I didn’t know what to do with it after I had left. However, I did know one thing: I didn’t have quite enough money to support my lifestyle. And I had $4,000 just sitting in an unused account.
Tuition came due, and my Chick-fil-A job didn’t provide quite enough money at the time. I had a choice: I could either eat or pay my tuition.
The thought of cashing out that retirement account became increasingly desirable. Why not take it out? It won’t hurt anything will it? After all, I needed to eat. Plus, I really wanted to continue grad school.
So, what did I do? I decided to cash out my retirement account.
This turned out to be one of my most foolish financial mistakes.
Why It Was Foolish to Cash Out My 401(k)
Some of you might think I had no choice but to cash out my 401(k). But I would say I had plenty of options. I just lacked the sense to ask for help or to explore my options. Therefore, it was foolish to close out my retirement account. Here are the three main reasons:
1. I missed out on A LOT of compound interest (over $250,000)
Being a nerd, I just had to do some math on this. And boy, did it hit me hard! Assuming a 10% rate of return over 40 years, my 401(k) would have gained more than $250,000 in interest! And that’s if I had just left it alone! Now I’ll never, ever get that money back.
Investing allows you to benefit from the 8th wonder of the world: compound interest.
Essentially, compound interest allows you to earn interest on your interest. Now, it doesn’t look like a lot at first. But over the course of 40+ years, you start to see major gains!
2. The taxes and penalties were outrageous
Did you know that the government hits you with 10% penalty for withdrawing from your 401(k)? Also, you have to pay taxes!
That means my little withdrawal ended up costing me nearly $1,000 in taxes and penalties. Therefore, I didn’t get my full amount of $4,000. The government ended up taking about a fourth of it.
3. I had other options
The reality is I just didn’t consider other options. I blinded myself to other considerations. In retrospect, here were some of my unseen options:
- I had the experience to get a higher-paying job than Chick-fil-A. In other words, I didn’t have to work for a measly $8.50 an hour.
- There were people who could have answered my questions. My family had a financial advisor at the time who could have helped me.
- I could have learned how to properly budget. It didn’t matter that I had an irregular income. I simply didn’t know where my money went every month.
But you know what they say. Hindsight is 20/20!
A Lack of Vision and an Abundance of Fear
This led to me making some rash decisions. As a result, I withdrew money from my retirement account that would have been worth more than $250,000!
Therefore, I urge you to have patience when the hard times hit. Seek counsel, do your research, and don’t let fear take control of you!
How to Handle Your Retirement Account in 2020
So, what can you learn from my mistakes? As it turns out, quite a lot! When the tough times come, you need to know how to handle your retirement account.
As I write this, it’s the year 2020. Currently, many people have come face-to-face with financial difficulty. However, the last thing you want to do is dive into your 401(k).
Instead, here are three things you need to do with your retirement account when the hard times come.
1. Don’t touch your retirement account
That’s right! Don’t touch it. Your retirement account is an investment for your future. Therefore, don’t steal from your future to make amends for today.
But what if the stock market starts to go down? Then that’s all the MORE reason to leave it there. Why? Because if you cash out your retirement when the market drops, you end up securing your losses. In other words, when you sell your stocks for the lowest price, you end up with less than if you had left it alone.
So chill out! History tells us the stock market will recover.
However, there are two circumstances where I would say it’s okay to take from your retirement account:
- To avoid bankruptcy
- To avoid a foreclosure
I say that because those are two life-altering events. Bankruptcy and foreclosure have the potential to leave you financially and emotionally scarred. Therefore, using money from your retirement accounts to avoid these extraordinarily painful events is acceptable.
But if you’re not in danger of bankruptcy or foreclosure, you have no reason to dive into your 401(k). Leave it and let it grow.
2. Keep investing if possible
Is your job stable? Do you still have a steady stream of income? Then you need to keep investing.
After all, you’re investing in your future. Now is not the time to skimp out! Plus, if the market is low, you can take advantage of it and buy at a lower price! Once the market goes up, the funds you purchased will have a higher value. Pretty cool, right?
Now, if you’ve lost some of your income or experienced a layoff, you should stop investing. Instead, focus on the most important budget items:
- Food: Eating is essential for life. Therefore, it’s essential to your budget.
- Housing: You need a place to live to protect yourself from the elements. And also so wild animals don’t come and eat you.
- Utilities: You can’t practice good hygiene without paying the water bill.
- Transportation: You need to have a way to get from point A to point B.
Try to find something in the meantime. It doesn’t have to be your dream job, but you need to be able to survive.
Once you find something more sustainable, you can then resume pouring into your retirement account.
3. Keep a long-term vision in mind
Investing for retirement is a long-term financial plan. This means over the years you will have some years where you gain 20%, while other years will lose 10%. And even then, those are usually the economic extremes. Most years, with strong investments, you’ll likely average around 7-12%.
Therefore, you don’t need to constantly check your gains or losses every single day on your retirement account. Otherwise, you’ll drive yourself crazy. Remember, you’re saving for the future, not for today.
Now, that doesn’t mean you should check up on your retirement account’s performance every now and then. Check your monthly and quarterly statements. If your current investment strategy doesn’t perform over time, you need to make some changes!
I highly recommend working with an investment professional. Personally, I use one of Dave Ramsey’s SmartVestor Pros. I have to say, this was one of the best investment decisions I’ve ever made. Check them out and see if a SmartVestor Pro is a good fit for you.
Don’t Let Fear Dictate How Your Handle Your Retirement Account in 2020
Whatever you do, don’t let fear dictate what you do in 2020. Yes, we live in some pretty volatile times. But the reality is America has seen harder times. And guess what? The stock market recovered every time. The pandemics eventually went away. And the wars and conflicts came to an end (albeit sometimes very slowly).
Through it all, the American economy stayed strong! It survives Democrat and Republican presidents, wars, diseases, terrorist attacks, Supreme Court rulings, and more.
Here’s another truth: you will personally see hard times, regardless of the economy. You will have emergencies, tragedies, and desperate moments. When these come, you need a plan that can help you keep your mind on track.
Therefore, train your mind so that you can face fear head on when it comes. For me, it helps to store up some Scripture when the hard times come. After all, you don’t really have control over every aspect of your life. But you can place your trust in the One who does. Here are a few verses you can store up:
“For God gave us a spirit not of fear but of power and love and self-control.”2 Timothy 1:7
“For you did not receive the spirit of slavery to fall back into fear, but you have received the Spirit of adoption as sons, by whom we cry, ‘Abba! Father!'”Romans 8:15
“Therefore do not be anxious about tomorrow, for tomorrow will be anxious for itself. Sufficient for the day is its own trouble.”Matthew 6:34
Resources to help you make a plan
Fortunately, there are plenty of resources to help you whenever the tough times come! Here are some of the ones I personally recommend:Try Audible and Get Two Free Audiobooks
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Retire Inspired by Chris Hogan is THE definitive book on retirement planning. Chris covers everything you need to know about planning for an awesome retirement.
The Total Money Makeover by Dave Ramsey presents the best possible plan for taking control of your finances. His 7 baby steps are easy to understand and simple to implement. You only have to overcome your own mental hurdles to find success.
Now, go out there and learn how to handle your retirement account in 2020 like a champ!