Unfortunately, a great number of people cash out. Hewitt Associates has done a lot of detailed analysis on 401(k) ownership, and has found that 45 percent of employees, upon leaving an employer, opt for a lump sum and do not roll the money over. Assume you have $5,000 invested in a 401(k) and cashed out the money. After paying a 10 percent early withdrawal fee AND federal and state income taxes, you would be left with about $2,900. My recommendation is to roll your assets into one IRA or just leave the money in the plan.
Should you start saving your money differently?
The only change you should make in your saving and investing habits is to put more away toward your emergency savings fund. I always recommend that people have between 3 to 6 months saved for situations such as an unexpected job loss.
I recommend putting your money in a money market fund -- a safe and conservative way to protect your money. At the same time, if you can afford to, continue to make contributions toward your 401(k) plan. If you do lose your job, your retirement savings is likely going to take a back seat, so you want to do what you can to keep contributing to your retirement cushion while you can.
How about a loan on your 401(k)? Is that a good idea?
I have to tell you, this should absolutely be the area of last resort for you to lean on. However, more and more employees are tapping into their 401(k) plan for loans. According to a study by Boston College, the percentage of employees taking a loan against their 401(k) plans has more than doubled in the last two years.
Taking out a hardship loan from a retirement plan is a last resort. It's not an ATM machine. Before you take this step, which penalizes you in retirement, cut back on eating out, discretionary purchases, like clothing and vacations, fuel costs and so forth. For every $10 you take out from your account, you really have $6 or $7 to spend because of fees, and in the long run, that money will not be accruing interest.
Mellody Hobson, president of Ariel Investments in Chicago, is "Good Morning America's" personal finance expert. Click here to visit her Web site, www.arielinvestments.com. Matthew Yale contributed to this report.