Let me spin you a cautionary financial tale. It is about a person who felt he had no other option than to trade in his future to pay for the present. Someone who decided to cash out a retirement account he had spent over 12 years accumulating--an account he practically viewed as part of the family. That person, of course, is me. I made the critical mistake of cashing out a retirement plan that had a value of roughly $55,000 and would have paid somewhere in the neighborhood of $3000+ per month once I reached age 55. It would have been easy to raise the total amount to $4,000+ per month once I joined it with the retirement plan from my current job, assuming I am there until I turn 55. I still have the option of staying at my current job and collecting that retirement , but the account I cashed out (along with its future value) is gone forever.
Why in the hell did I cash out my future?
My family and I moved to Austin and purchased a house after selling our old home located in the Houston area. I was receiving a nice paycheck at my new job, but it was still lower than what I was making previously. My wife also had a good job before but was not able work once we moved because of my crazy work hours. Our savings quickly dwindled because we were still living our same lifestyle as before but with substantially less income coming in. Then the unthinkable happened...I lost my job. Although I got a lead on a new job quickly, we only had a few thousand dollars left in savings and would need more money soon. I then made a decision that I know will haunt me for the rest of my life. I opted to cash in my retirement plan that had grown from humble beginnings to a future retirement paying monster. In retrospect the decision was easy, (hell, my family had to eat) but often I fondly recall my lost retirement account and think about the good times we almost had. Ah...those could have been the days.
It took a little while, but we both found other jobs and eventually got back on our feet. The money that was to provide for our future however, was long gone. It was sacrificed to help us get through the hard financial times, but we were left questioning what could have been done differently.
A little background on what type of retirement plan I had.
- The retirement plan was administered with member contributions through the Texas and County District Retirement System (TCDRS) and has very strict state controls over what they are allowed to invest its members money in.
- I contributed 7% of my paycheck directly to the fund and the county agency where I worked contributed 200% as a matching of what I did. My contributions and the county’s contributions are designed to be kept 100% separate until a retirement age is reached using the rule of 75. The Rule of 75 states that a member’s age and years of service must equal 75 before the member is eligible for retirement. Example: If the member is 50 years old and has worked at the job for 25 years and wants to retire, he or she would be able to since the age and years of service equal 75.
- The retirement program has a guaranteed yearly growth rate of 7% (per state law) even when savings accounts and Certificates of Deposit are paying about 1% nationally, like today’s rates.
- The member has no access to his/her account while still employed with the agency where he/she is working. It is a little bit different than a 401k plan that allows members to borrow against their balance while still employed at their current job.
- The retirement plan has 100% transparency on what its investments are and what the gains/losses are on those investment for members.
What were my retirement account stats at the time of cashout?
This all happened a few years ago and I had to pay some hefty taxes on top of the early withdrawal penalty of 10%. It was also combined with the incomes we were making at our new jobs which gave us quite a tax bill. You should always consider what the early withdrawal penalty and increase of earned income for the year does to your tax situation before withdrawing.
Age : 37
Account balance : $55,000
Annual guaranteed growth : 7%
Employer matching at retirement : 200% of balance
Years of service : 12 years 2 months
Military service credit : 5 years (maximum)
Total service credit : 17 years 2 months
Combined service credit (17 years 2 months) and age (37) : 54 years 2 months
The Scenarios below are what my accounts would have roughly looked like at age 55 without me taking the early withdrawal option on the TCDRS job. The TMRS job remains the same.
TCDRS Account : (My former job)
I worked at this job for 12 years to get to a balance of about $55,000. The balance would have grown at 7% for the next 15 years until I reached the age of 55. The account balance number I am using is the final balance plus 200% employer matching.
Age : 55
Account balance : $521,202 (with 200% employer matching at retirement included)
Annual growth after retirement : 7%
Approximate payout per year : $40,000
Monthly retirement check : Between $3,000 and $3,300 ( depending on several factors)
TMRS Account : (My current job)
My current balance on this account is about $9,000. Assuming I contribute 7% of my check (approx $3,000 per year) for the next 15 years until the age of 55, the final balance will be roughly $80,000. My employer will then match the balance at 200%.
Age : 55 (current balance as of 05/16/2013 approx $9,000)
Account balance : $250,000 ( with 200% employer matching at retirement included)
Annual growth after retirement : 5%
Approximate payout per year : $13,000 to $16,000 (depending on several factors)
Monthly retirement check : Between $1,200 and $1,500 (depending on several factors and assuming that I will continue to work at my current job and get raises)
It gets better! The state of Texas allows you to combine time together to satisfy the Rule of 75.
I would still have needed to get to the 75 mark before I could retire, but fortunately, I got another job (after losing my first one) with a similar state regulated retirement system called Texas Municipal Retirement System (TMRS). The state of Texas also allows for something called the Proportionate Retirement Program, a program that allows people to use the time of service for two or more state retirement programs to satisfy the retirement rule requirements simultaneously in each program. My current job has a vesting period of 5 years before I will be allowed to proportionately retire with combination of TCDRS and TMRS.
The Meat of the Potatoes
The accounts would have been combined at the age of 55 using the above mentioned Rule of 75 and easily would have allowed me a full retirement income for the rest of my life. I am still going to receive a retirement income from my current job, (if I stay until 55) but it will be much lower than what I would have been getting every month had they been combined. It is an easy sell for me to tell anyone who is reading this that you should really weigh all of your options (present and future) before cashing in a retirement account.
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