It's a 401(k), Not a Piggy Bank ... So Don't Treat It Like One

Photographed:  March 17, 2005  42-16786525broken piggy bank pink money penny pennies breaking the bank break brokecheap inexpens
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One of the joys we have as parents is teaching our three kids about money. With the oldest being just 6, a big part of that revolves around her piggy bank. Whenever she gets a small amount of money, it goes in there, and we talk with her about the importance of saving, giving, and having some to spend on things she wants, which is usually along the lines of a gumball.

With a piggy bank, you put money in and take it out. It's a fairly simple tool, and it's great for what it's used for. A 401(k), on the other hand, is a great tool to save for retirement. But increasingly, 401(k)s are being used as something they aren't -– piggy banks.

Startling Statistics

Recent studies show that Americans are increasingly pilfering from their 401(k) accounts. With the economy being the way it has been since the financial crisis, that's understandable on one level, but the choice can put your retirement plans on a slippery slope.

According to the IRS, $57 billion was withdrawn prematurely from 401(k) accounts in 2011 -- up 37 percent in inflation-adjusted dollars from 2003. You could argue that if a person needed the money to survive, then an early withdrawal from a 401(k), even with the tax penalty, is better than other options. That would be right -- to a point.

The most disconcerting number, in my opinion, is that younger individuals are withdrawing the most. According to a Fidelity (FNF) study, nearly 40 percent of workers between 20 and 39 are cashing out their 401(k) plans when they change jobs. There could be many reasons for this, but the Fidelity study points out that many don't see the need to roll over their old 401(k)s when the amount being considered is "only" several thousand dollars or a little more. Add that to those people who take out 401(k) loans to fund such things as real estate purchases, and it paints a worrisome picture.

The Real Purpose of a 401(k)

To a degree that it hasn't for decades, the burden of retirement planning now falls on individuals. Only about 30 percent of companies still provide pensions, and even among those, more firms are freezing them.

In light of that, your 401(k), with its tax-advantaged status, is likely going to be one of your best options for putting aside money for retirement. While there may be times where you need to take out loans for different purposes, simply cashing out a 401(k) should be avoided at all possible. This is especially the case if you switch jobs: When that happens, you will want to either roll over your 401(k) into your new plan or into a rollover IRA. Not only will this allow you to avoid losing money due to early withdrawal penalties, but it will also keep the power of compound growth on your side as you build up your retirement nest egg.

Saving for Retirement Is a Long Game

The rise in early 401(k) withdrawals reveals a broad lack of understanding about retirement planning. Saving for your old age is is a marathon, not a sprint -- one that takes decades to complete. By raiding your 401(k), you're only harming your future. Unless you plan on working until you're 80, it behooves you to leave your savings untouched so you can reach retirement relatively close to when you plan to.

When we're talking about amounts under $10,000, it can be easy to think that they'll mean nothing in the long run. But if you invest it wisely and let it stay in the market long-term, it can build on itself to and turn into serious money each month for you in retirement. (Don't believe it? Check out the first two slides in this article. The math is clear: Small Money + Time to Compound = Big Money)

Part of saving for retirement is making sure we're doing what's best with our 401(k) funds. If you're tempted to withdraw money from it early, ask yourself if raiding your savings now is the best decision for your long-term wealth. In most cases, it's not.

John Schmoll is the founder of Frugal Rules, a finance blog that regularly discusses investing, budgeting, and frugal living. John is a father, husband, and veteran of the financial services industry who's passionate about helping people find freedom through frugality. He also writes about wise ways to manage your money at

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I really think it's just an irreversible cycle that will not end but only get worse. The whole will continue to deepen. If you think the "Baby Boomers" hit us bad wait till the "Millennials"
Just enjoy life while you can and do cool things like

September 17 2014 at 12:48 AM Report abuse rate up rate down Reply

Of course I take out loans when I need them. However, while I'm paying them back, I still have money going, what's the gripe for? With intrest, I'm putting back more than borrowed.

May 20 2014 at 11:47 PM Report abuse rate up rate down Reply

Nobody has any confidence AT ALL in the future of USA ,IF we make the mistake of electing another incompetent President.There are pictures circulating in Internet of the jerk with his dirty shoes on top of all the furniture of the WH,there is no class and respect for historic pieces....401 K were excellent tools to save for retirement,but that was in the past...I think this regime will collapse the dollar,our economy and our future

May 20 2014 at 5:57 PM Report abuse -3 rate up rate down Reply
2 replies to thefacts22's comment

Here. Here's a pic of Bush with HIS FEET up on the desk. Now quit yer yappin'.

May 20 2014 at 7:55 PM Report abuse +2 rate up rate down Reply

Here's a picture of Ford doing the same thing. So you can make about big deal about both of those two as well, or you can shut your pie hole. Your call.

May 20 2014 at 8:00 PM Report abuse rate up rate down Reply

You do everything right and save for retirement years, but don't look for or expect to get any beneifits for doing so. You will have to use your saved money all up before you can get any help from anyone. Plus you don't even know how much your savings is really costing you until you start withdrawing it.

May 20 2014 at 5:33 PM Report abuse +1 rate up rate down Reply

57 Billion was withdrawn from 401 because those people need their money for everyday life and the rest are smart enough that they don't trust corporate America or the government. And why should they! After the last crises no one that caused it went to prison. That tells me that it's all about stealing Americans wealth. The top 1% have the use of trading computers that the rest of us don't.Corporations are taking medical benes. and freezing pensions. Yet they are making record profits. The leaders of AIG got bonuses even though the company was failing. Until all of those folks are in real prison I'll keep my money as close to me as possible. What a farce. They can't steal your money if it's in a gaurenteed pension so they'll force you to put it in a 401 where they can take it from you legally. tha's why they wanted to privitize social security. Then you would end up old and eating out of dumpsters cause your money would be gone.

May 20 2014 at 11:48 AM Report abuse +10 rate up rate down Reply
1 reply to Ben's comment

The main reason of "taking" the money out,is because VERY FEW trust the future of USA

May 20 2014 at 6:02 PM Report abuse -2 rate up rate down Reply

Beware of the 401k collapse because crap jobs don't make a solid economy.

May 20 2014 at 10:58 AM Report abuse +10 rate up rate down Reply
2 replies to Iselin007's comment

If you include part-time as 'crap jobs' I am with you 100%. Additionally, parttime and/or temporary jobs shouldn't be counted as employed(especially when the person wants fulltime work). An 'underemployed' category should be made and included on the unemployed side so as to emphasis this growing problem with the job market. 10.3% or 11.3% would draw more attention than a 6.3% unemployment figure.

May 20 2014 at 11:23 AM Report abuse +3 rate up rate down Reply

I agree with you

May 20 2014 at 6:03 PM Report abuse rate up rate down Reply