By Rachel Pleasant
Staff Writer

When it comes to saving for retirement, starting early is paramount, financial advisers say, but a recent study says young people may not be getting the message—at least not entirely.

According to a recent survey conducted by Hewitt Associates, a human resources firm with offices in 35 countries, nearly two-thirds of employees between the ages of 20 and 29 cashed out their 401(k) plans when they changed jobs.

Youth may be tied to another important finding of the study. Nearly 73% of employees whose balances were less than $10,000 opted to cash out their 401(k) plans, but as the balances increased, cash-outs became less common.

Charleston’s financial advisers have a message for young people eyeing their 401(k) statements: hands off. Saving and keeping your money in savings is crucial to financial well-being.

“The reason young people are doing this, I’d have to guess since I can’t ask them, is that they haven’t saved a significant amount of money. They’re probably only doing enough to get their company’s match, if that,” says Wayne Cassaday, a certified financial planner at Covenant Financial in Mount Pleasant.

Cassaday says early withdrawal—a withdrawal before the age of 59 ½—means big penalties.

“You’re facing a 10% penalty and taxes,” he says. “If you’re in the 25% tax bracket and in South Carolina, you face the 7% state tax, plus a 10% penalty, then 42% of your savings is going to dissipate in taxes. That means on every dollar, you’re going to get 58 cents,” Cassaday says. “Young people probably figure that their company’s match is enough to pay the taxes so they’re getting their money back.”

Too often, Cassaday says, he sees young people thinking about fashion and fun rather than the future.

“They want to go on vacations, buy new cars and clothes. They want to spend on discretionary expenses,” he says. “I think a lot of young people would rather go to Mexico than to think about their futures.”

In addition to a dose of self-discipline, young people also need to get serious about savings if they’re going to see their 401(k) accounts grow.

For example, when making a job change, Cassaday says, relocation expenses will be incurred. Young people might be forced to use their retirement savings simply because that is all their savings.

“The other issue is that young people don’t have enough emergency reserves,” Cassaday says. “In a separate account, they need to be maintaining a three-month non-discretionary expense fund to pay for rent, utilities, food, prescriptions. These are things that are non-negotiable.”

Cassaday recommends putting money for emergencies in a savings or money market account or in a certificate of deposit.

“They need to put it in something safe,” he says.

Of course, there are government-approved reasons for dipping into a retirement account, including a down payment on a home, higher education and medical expenses if they exceed 7.5% of a person’s income.

Besides these three scenarios, Cassaday says it is important to leave your 401(k) alone unless there is a true emergency, such as an eviction or repossession, for example.

Instead of raiding your 401(k), says Justin Gore, a financial adviser with Charleston Asset Management, simply roll it over.

“You should roll it over into an IRA or roll it over into the 401(k) plan at your new job,” Gore says. “This money is made for retirement, and the longer you save, the better off you are.”

Just how much better off is a younger person who holds onto savings?

“It means the difference between retiring at a reasonable age and working the rest of your life at Wal-Mart,” Cassaday says.

“There’s a good example of two twins. One is 18 years old and puts $3,000 aside from the time he’s 18 to 28. The other lives well and travels more. At 28, they both get married, and the guy that didn’t have anything to set aside starts to save $3,000 every year between 28 and 65. The other guy decides he can’t afford to save when he gets married and has kids,” Cassaday says.

“The other guy starts out at 28 and puts in money for 37 years, but he still has less than his brother. Starting early is important.”

Rachel Pleasant is a staff writer for the Business Journal. E-mail her at rpleasant@charlestonbusiness.com.

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