If you had a little extra cash in your wedding budget, what would you spend it on: designer shoes, more flowers, fancier wine? Or would you rather set that extra money aside for the future as an investment or for your retirement? While you may be tempted to borrow from your 401k for your wedding, remember that it’s an important fund that helps you prepare for retirement. We spoke with Katie Taylor, vice president of Thought Leadership at Fidelity, about 401k and IRA accounts and whether you should use them now or save them for later.
Millennials and 401ks
“About 23 percent of the people who cash out their 401k accounts are under 30,” Taylor says. “Millennials tend to switch jobs a few times before they turn 30, and if they have a 401k with their previous employer, they have to decide what to do with it.” Typically, if the balance of your 401k is under $5,000, the employer is able to force you out of their 401k plan—but that doesn’t mean you have to cash out. “If your previous employer forces you out of their plan, you also have the option to roll the funds you do have into an account with your new employer, or you can roll it into an IRA," she says. Less than $5,000 doesn’t sound like much money, but the benefit of a 401k or IRA is the accounts are tax-sheltered until you retire, and have the ability to grow through investment and market activity. “It’s not much now, but it will be a lot more in a few decades,” Taylor says.
What Happens if You Cash Out
So what happens if you do cash out? Well, the money isn’t just yours. “If you opt to cash out when you leave your job, you’ll have to pay a 10 percent penalty, plus state and federal taxes,” Taylor says. “Even if you have $16,000 in your 401k when you leave your job, you’ll only receive about $11,000 because of those taxes and penalties—whereas, if you roll it into an IRA or a new employer’s account, you’ll have upward of $80,000 by the time you retire.”
If you are actively working, cashing out your 401k is not actually an option. “You can’t take the funds out of your account until you are over the age of 59.5,” Taylor says. “However, some employers have plans that allow you to take a loan out of the account with a wide variety of qualifications and requirements. But be careful! One to two loans from your 401k over the course of your career isn’t too bad—since you’re paying the interest back to your future self—but what we see is that some people become habitual loan takers.” Remember that once the money is out of your account, it’s no longer working for you. And pay attention to how the loan will be paid back. “Many plans only allow you to make the payments through payroll contributions—meaning you’ll be getting less money on payday,” Taylor says. “It’s important to consider the rules of your employer’s plan, as well as how that decreased paycheck will impact your financial situation.”
Another thing to consider? Most people working today don’t have pension plans. “Our parents and grandparents could depend on pension plans to help with retirement, but most Americans today need their 401k to fund their retirement,” Taylor says. “So while extra money for something immediate, like your wedding, sounds enticing, think about the impact this could have on you in the future. Instead, look to day-to-day budgeting and other ways to cut back on your daily spending to come up with extra funds for your big day.”
Your 401k and Your Future
Instead of tapping into your 401k or IRA for your wedding, make that money work for you. “There are three simple things to remember,” Taylor says.
First, make sure you’ve signed up. “Many employees are with a company for over a year before they sign up for the 401k program. It’s an employer benefit you should definitely take advantage of.”
Second, save as much as you can. “Make sure you’re saving enough to get your company’s matched contribution,” Taylor says. “One in five people don’t save enough to get it, which is hundreds (or thousands) of free dollars you’re not getting.” And if you can save more, do it. “Aim to save 15 percent of your income over the course of your career, including the employer contribution,” she says. “If you can’t get there in the beginning—especially if you need the money for something like your wedding—save as much as you can, and use the plan’s automatic increase program to annually increase your contribution by a set amount until you can get up to that 15 percent goal.”
Third, find an investment that is right for you. “Young people have so much ahead of them, and can take on more market risk. A higher concentration of equities will be more risk, as well as more return," she says. Or use your plan’s “do it for me” option, such as a mutual fund or target date fund. “If you’re not planning to retire until 2055, enroll in the 2055 fund in your 401k plan, which will invest the money in ways that are appropriate for your age and timeline.” Of course, you can also choose more specific investments that align with your objectives.
“Getting married is a huge deal,” Taylor says. “It’s important for couples to think about it in terms of their overall budget and finances, not just what they’re spending on one day. Look for ways to tweak your daily budget to find money for your wedding there instead of in your retirement savings.” From bringing your lunch to work to skipping Starbucks, you can save $100 or more a week just by making some small changes. “It doesn’t have to be a quick sum of a lot of money, but instead can be small amounts that you save over the course of your engagement. Take a hard look at your current expenses to find other ways to save money that won’t jeopardize your retirement.”