5 Things to Do Before Cashing Out Your Retirement Plan

By Ron DeLegge, Editor

October 13, 2008

SAN DIEGO (ETFguide.com) – If you’ve already received your third quarter 401(k) or IRA retirement plan statement and you don’t like what you see, be careful about your next decision.

Instead of making panicked choices based upon the unnerving ups and downs of the stock market, be calm, logical, and deliberate. If you’re still tempted to cash out your retirement plan, first consider these 5 key steps.  

1. Revisit your Investment Mix

If your IRA or 401(k) retirement plan has fallen harder and faster than major stock market benchmarks like the Dow Jones Industrial Average (AMEX: DIA) or the S&P 500 (AMEX: SPY), it’s probably because you have the wrong mix of investments. Instead of cashing out your entire retirement plan, simply adjust your investment mix.

Here’s an illustration to help you understand: If your radio is too loud, do you throw it out the window? Of course not! You simply adjust the volume and get it back to an acceptable listening level. The same applies to your retirement plan. Instead of tossing your plan into the garbage, get an acceptable mix of investments that match your risk tolerance and financial goals.

2. Use the Right Financial Ingredients

Hewitt Associate's research shows that that average 401(k) plan offers 11 investment options. Yet, Hewitt's study of 500,000 retirement plan participants discovered that a very large 36 percent of people allocate their money to just one single fund. Another 19 percent allocate money to only two funds. Riding your retirement fortunes on 1 or 2 funds isn’t the answer! Use a diverse mix of funds or multiple ingredients to achieve your investment goals.

Also, if your job offers stock options, it’s prudent to make sure you don’t overdose. Company stock that represents more than 50% of your net worth can be dangerous. If your company’s stock craters or even worse, if your company goes belly-up, the financial consequences could be disastrous. (See Enron, MCI Worldcom, Lehman Brothers, etc.)

3. Rollover Your 401(k) Money

If you’ve taken an early retirement, got let go, or otherwise left your job, don’t make a bad situation worse. Taking your 401(k) or profit sharing nest egg in a lump sum payment to yourself will add to your financial pain. Not only will you pay hefty income taxes on the money, but if you’re under age 59 ½ you’ll pay substantial penalties to the IRS.

Many retirement experts agree that it’s advisable to establish an individual retirement account (IRA) and to rollover your 401(k) money directly into your IRA. This will save you the hassle of paying unnecessary taxes to the IRS and it’ll allow you to have a larger menu of investment choices. (If you’re not sure how to do a 401(k) retirement rollover, see the final step of this article.)

4. Talk to Your Employer

If you’re stuck with a 401(k) plan that has a substandard menu of investment choices, put your company on notice. It’s your right to have an adequate retirement plan that meets your financial needs.

It’s usually best to draft a simple but direct letter explaining to your boss that the current 401(k) menu is not acceptable. Maybe the investments cost too much or aren’t diversified enough. Suggest a diversified mix of low cost index mutual funds or even exchange-traded funds (ETFs). Good core portfolio choices include a total stock market index fund (NYSEArca: VTI), international stocks (AMEX: EFA), commodities (AMEX: DBC), real estate (NYSEArca: VNQ), and bonds (NYSEArca: AGG). If you really want to be heard, try getting other fellow workers to sign your petition letter. If enough people are dissatisfied, it could help your employer to see the light.

It’s your employer’s responsibility to not just merely offer a 401(k) retirement plan, but one that complies with the Department of Labor requirements and one that helps its employees to reach their financial goals.  

5. Get Professional Help

If you have a serious medical condition and you’ve exhausted all of your options but nothing seems to work, it’s logical to seek professional help. The same thing applies to your financial and investment planning. If you’ve lost a substantial portion of your retirement funds due to poor decisions or panicked reactions to a crazy stock market, it’s wise to talk to an investment advisor.

If you already work with an advisor but you’re unsatisfied with the results of their investment advice, look to other sources. IndexShow.com has a free referral service to a select group of pre-screened investment advisors. If you’re still committed to the idea of managing your own retirement portfolio, you can use other solid resources like ETFguide’s Profit Strategy Newsletter along with Yahoo's Finance Center.