Posted on: Thursday, June 9, 2005

THE COLOR OF MONEY
Preserve 401(k) accounts to build up your retirement portfolio

By Michelle Singletary

I always tell people not to beat themselves up when they don't understand the many personal finance issues we all have to deal with. If you don't know, ask.

As Thomas Jefferson said: "Question with boldness." With that in mind, here are some questions I couldn't answer during my regular online discussion at washingtonpost.com:

Q: I understand a 401(k) plan should be viewed as a long-term investment. My concern is, I'm young and every time I change jobs I need to close my account and start a new one with my new employer. I'm worried if I don't stay with one employer for 20-plus years, I'll have a difficult time benefiting from the long-term hold.

A: First, you are right and wrong. You are right to want to take a long-term view on your retirement investing. But you are wrong that you can't continue to grow your retirement investment portfolio as you change jobs. When you invest in a 401(k) plan, think of the account as a big pot. Once you've put money into that pot by buying mutual fund shares, it doesn't matter if you change jobs. You can either take the pot with you to your new job or leave it at your old one, depending on how much is in the account.

You can also transfer the various 401(k) accounts to a rollover IRA, which is just a way to consolidate your retirement assets. With a rollover IRA you can invest with any financial company and have more choices of how to invest the money than a typical 401(k) plan.

What I hope you aren't doing is cashing out the accounts when you leave those jobs. If you are, stop doing that because you're right — you won't have much for retirement. Not to mention you will have to pay taxes and penalties. When switching jobs, talk to your 401(k) plan administrator or benefits office to discuss your options.

Q: I'm 27 and a fairly new contributor to my 401(k). I have about $5,600 in it. I'm wondering if it would be OK to temporarily drop my contributions to 3 percent of my income — the amount my employer matches — and put the other 6 percent I've been contributing toward my emergency savings. I only have about $2,000 in the emergency account, which is about a month's worth of expenses. I also have $10,000 in student loan debt and $8,000 remaining on a car loan. I'm worried about what will happen if I become temporarily disabled or I lose my job. I wouldn't want to raid the 401(k).

A: I think you're right to try and build up your emergency fund. It's absolutely necessary to have a rainy-day fund because guess what? It always rains — i.e. people lose their jobs or get sick and lose time from work. But be careful that your temporary solution doesn't become a permanent reduction in your retirement savings. And keep in mind what Oscar Wilde said: "There is nothing like youth. The middle-aged are mortgaged to life. The old are in life's lumber-room. But youth is the lord of life. Youth has a kingdom waiting for it." As a young person, you have a lifetime to get the right mix of saving for what you want now and saving for your retirement.

Q: I think I need a kick in the pants. My husband and I had been working really hard to keep to a budget. It was really hard, but we were doing it — paying down our credit card debt, saving, paying for everything in cash. We just found out that I'm having a baby (happy but ill-timed). And my husband just lost his job. I just want to give up. I feel like it doesn't matter — that the credit cards will just go back up to where they were, that our savings will be all gone. I'm just sad.

A: You don't need a kick in the pants. You need a hug and then a plan. With all the changes, you have to go back to your budget and see what can be cut. Your husband should get any job he can find to bring in something. Try as long as you can to hold off using the credit cards to supplement your missing income. Just know that things will be tough but would be a lot worse had you not been managing your money.

Michelle Singletary writes for The Washington Post