The convenience of 401(k)s and other employer-sponsored retirement plans have turned many Americans into investors. That’s good news, since it is becoming evident that fewer retirees in the future will have substantial pensions and more will have to rely on their own savings to cover their needs.
Statistics show, however, that the average American will change jobs at least 10 times throughout his or her lifetime. This could make it more difficult to maintain a retirement account, unfortunately, since many people opt to “cash out” their retirement savings when they leave their jobs.
In fact, according to a 2003 survey by global human resources services firm Hewitt Associates, 42 percent of people cash out their retirement savings when they change jobs. The number is higher for younger people and people with lower balances: 50 percent of people aged 20 to 29 cash out, while 72 percent take cash if the account balance is between $5,000 and $10,000.
There is a smarter way to handle your retirement fund when you change jobs: Simply roll it over. By transferring your funds to a Rollover IRA, you avoid paying taxes now, giving your money the opportunity to grow tax-deferred. You also won’t be hit with an early-withdrawal penalty if you don’t take out funds before you turn 59 1/2.
Among the many financial firms offering Rollover IRAs, T. Rowe Price has one of the more simple and flexible solutions. Its free interactive CD-ROM, “The T. Rowe Price Rollover Planner,” helps investors decide what to do with their existing 401(k)s when changing jobs or retiring.
“The T. Rowe Price Rollover Planner” includes a distribution calculator that allows investors to compare the dramatic differences between taking cash distributions when changing jobs and keeping the money invested in tax-deferred accounts.
For example, a 35-year-old with $25,000 in a 401(k) who chooses to cash out would end up with just $15,750, assuming a 27 percent tax rate and a 10 percent early-withdrawal penalty. If the money were rolled over to an IRA, however, the account would be worth an estimated $252,000 before taxes when the individual reaches age 65, assuming an 8 percent average annual rate of return.
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Yes, this is a good idea! I know you want to know what is mad money? Well, a long time ago this term came about when a young lady went out with her friend to a party and her friend left her at the party with no way home. So, the young lady was mad with her friend that left her at the party and luckily for her, she had money stowed away in her shoe to take a cab back home. She thought to herself on her way home in the cab, that it was good that her mother had taught her to always have money set aside for emergency situations such as this!
Thank goodness, this young lady had the forethought to stash her mad money away so she could take a cab back home, since her friend left her in a lurch. Get the point? Having an emergency fund whether it be mad money or saved money is important for you to have. You say, how do I go about doing this? Well, you can read these tips to help you learn what you can do:
1) Set up a savings account specifically for your emergency fund or mad money fund. Whatever you want to call it, just establish one!
2) Deposit a certain amount of money on a weekly, biweekly, or monthly basis in your account. You may want to set up automatic deposits to your account via your payroll department. Or, you may want to have your bank automatically withdraw a certain amount of money from your checking account into your emergency or mad money savings account.
3) Try to save at least 2-3 months of your monthly salary to cover your bills for at least three months if you were to loose your job. This amount of time will hopefully allow you the cushion you need until you secure new employment.
4) The money you save in your emergency or mad money account should be used for household emergencies, personal emergencies or if you’re no longer able to work. Don’t use it for other expenditures such as bills, travel, etc… Get the idea? It’s a savings account that you don’t want to touch unless it’s absolutely necessary!
5) Make sure the bank account you put your emergency or mad money into, is paying you the most interest you can earn for this account! Research as many sources as possible on securing the best interest rate you can get. Check with your bank, the internet, newspaper and other sources for the prevailing interest rate. You want to make sure your money can be accessed easily and quickly if you need it for an emergency!
By establishing an emergency or mad money fund, this will give you a better peace of mind if you need access to money when there is an emergency in your life. So, the sooner you start setting money aside for a rainy day, the better off you will be! Make sure the amount of money you contribute to your emergency or mad money fund, is realistic for your budget. Save as much as you can without upsetting your overall personal or family finances. So go ahead, get started today!