One of my duties as a CRPC is to assist people with rolling over their 401k/403b plans when they change jobs. More often than not, this is a pretty simple conversation to have. I explain how they are able to transfer the funds to another qualified plan and avoid any taxes or penalties. Usually, that is all anyone needs to hear. They hate taxes, and hate penalties, so the decision is simple. Well, today I met someone that didn’t quite grasp this concept.
Not that I was surprised to encounter someone who didn’t understand all of the options, but her reasoning was what surprised me. The conversation we had follows.
“Don’t Even Ask About Rollovers, I Don’t Want to Hear It”
When I answered the phone, I was shocked to hear someone jump right into their request. The first thing I heard was:
Hi, my name is Jane Doe, and I’ll be leaving the company in a few weeks and I want to cash out my 401k. Don’t even ask me about a rollover, because I don’t want to hear it.
Not a problem, as I could assist her with the request. So, I explain the process and let her know what steps she will need to take, and how long to expect everything to take. . Nothing very complicated when doing a distribution, and she was pleasantly surprised that I wasn’t giving her a hassle about it. She only has to wait until her actual termination date before anything can be done. Of course, I was still curious as to why she was so adamant about not doing a rollover–so I asked.
It is a Calculated Risk
Even though she told me not to ask, I still wanted to know why she insisted on throwing more than 30% of her money away at age 42 when she didn’t have to, and her response confused me. She said that by cashing out early, she knew exactly how much money she was going to lose. The roughly 25% to ordinary taxes, and another 10% for early withdrawal. She was proud to call this a “calculated risk.” She must have just heard this term in a movie, book, or on TV, because she was using it wrong.
I told her that taking the early withdrawal wasn’t a risk, but it was a guarantee that she would lose unnecessary money. She responded by saying something to the effect, “of it was better to know how much you’re losing than to possibly lose more.” Okay, I guess you could say that losing 30% vs. 50% would be a better option, but what are the chances of losing half of your money?
It Happened the Last Time I Rolled Money Over
Finally, the truth begins to unfold. Her “calculated risk” was based on the fact that she somehow managed to lose nearly 50% of her old 401k when she rolled it over. But how do you lose money rolling over a retirement plan? Well, you don’t, unless you’re this woman who had the unfortunate timing of rolling over her account in 2000. Apparently her incredible $40,000 account had such an impact on the stock market that when she rolled out of her previous plan, the whole stock market tanked that year.
She insisted that it was the act of rolling the money into a new account that was responsible for the losses, and refused to entertain the notion that everyone invested heavily in equities lost a significant amount of money during that same period. She then repeatedly told me that she doesn’t trust retirement plans, and she would lose half of her money if she rolled it over again, so she was satisfied with only losing about 30% instead of 50%.
I Wish This Was a Joke
I really wish that I could tell you now that this was all a joke or a made up story, but it is not. Sadly, it is stories like these that make me realize how important it is for people to take some time to educate themselves about personal finance so that mistakes like this don’t continue to happen. Either way, I did my best, and since she can’t move her money for a few more weeks, I’ll have one more opportunity to talk to her when she calls again to request the forms. Maybe between now and then she will see, hear, or read something that changes her mind.
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Filed Under: Personal Finance
About the Author: Jeremy Vohwinkle is a Chartered Retirement Planning Counselor® and spent a few years working as a financial planner. Today, he helps people make the most of their money by writing about personal finance here and elsewhere on the web. Jeremy is also Coach at Adaptu and a regular contributor for other publications such as Intuit, and American Express. Be sure to follow Jeremy on Twitter or Google+.