When I left my career in the hotel business nearly seven years ago to become self-employed, I had a decision to make regarding my 401(k) account. According to a recent MSN Money article entitled, “Cashing out: the big 401(k) mistake” there are several options for making such a move. “When workers leave their jobs, they have the choice of leaving their 401(k) accounts alone, rolling them over into another tax-deferred retirement account or cashing them out and pocketing the money. Last year, 35 percent of all participants who left their jobs cashed out their accounts, according to the nation’s largest 401(k) provider, Fidelity Investments. That’s up slightly from 32 percent in 2009.”
I didn’t make the mistake of cashing out my retirement account when I left work, but this didn’t mean I handled the transition error-free. Rather, I made mistakes of my own; mistakes that ended up costing me thousands of dollars.
A 401(k) roll-over mistake
When I left my work in the hotel business, I decided to roll my 401(k) into an IRA. I’m not sure why I did this other than I had heard it was what people did when they left a job. However, I wasn’t starting a new 401(k) account with a new employer, I had good fund options within my 401(k) plan, and I was happy with the funds and fund performance.
Still, I rolled my plan over, encountering front-end load fees that cost me about $4,000 to land my money in new IRA funds that were much the same or even worse performing than the ones in my 401(k).
As I mentioned, I left the hotel business to become self-employed. I didn’t however realize just how difficult my road as an entrepreneur would be. My income was severely reduced, and while it grew over time, I still didn’t begin to contribute to my stock market-based retirement plan.
This mistake meant that I missed out on the low share prices that resulted from the market’s fall during the financial crisis and ensuing recession. It also meant that I missed out upon the share price growth during the eventual market recovery.
Working to fix the failure of non-contributions
Just because I didn’t contribute to my retirement fund for a period of several years doesn’t mean that I didn’t taken steps to rectify my retirement savings shortfall. Since I wasn’t personally growing my retirement account, I made the move to ensure that it grew itself. I therefore moved my IRA holdings into a dividend reinvestment fund. In this way, every month I earned dividends on my investment, which were in turn reinvested into the fund, growing my share total.
I also took the step this year to set aside small amounts to contribute to the plan. While $50 a week might not sound like a lot, its $2,600 a year, an amount which contributed annually over a period of 30 or more years can add up substantially.
In these ways, while my retirement planning mistakes have cost me, I’m working to maintain some forward progress on my plan growth.
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The author is not a licensed financial professional. This article is for informational purposes only and does not constitute advice of any kind. Any action taken by the reader due to the information provided in this article is solely at the reader’s discretion.