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Retirement
Climb to a safe retirement
August 24, 2000: 9:22 a.m. ET

Changing careers is fine, but keep a tight hold on retirement money
By Staff Writer Rob Lenihan
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NEW YORK (CNNfn) - Don't feel like sticking at your current job to get the gold watch and the CEO's handshake? You're not alone.

Research by the outplacement firm Challenger, Gray & Christmas Inc. has found frequent job changes now are accepted by both the employer and the employee as part of business.

graphicLast year, 13 percent of jobless managers and executives reported working less than two years at their previous jobs, compared with 6.7 percent in 1989. In the first half of 2000, the firm reports, 16 percent spent less than two years with their former employers.

So job-hopping may not carry the stigma it once did. But remember, as you swing from one corporate vine to another, you want to keep focused on your retirement benefits. One day you'll stop swinging and you'll want more to show for it than a strong pair of arms.

Can't touch this?


Generally, you have three options when dealing with your retirement money.  You can leave it in your old company's 401(k) program, transfer it to your new company's program or roll the money over into an IRA.

You could also take the money and spend or invest it, but bear in mind withdrawals from an IRA or retirement plan before you reach age 59-1/2 leave you open to a 10 percent tax penalty. This will put the brakes on the momentum of compound interest, which is crucial for long-term account growth.




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Experts say your choices will vary depending on your age, type of plans and personal goals. They also encourage consumers to speak with an accountant or financial planner before making any serious retirement moves.

"The easiest thing to do is leave (your savings) in the plan," said Dallas Salisbury, president and chief executive officer of the Employee Benefit Research Institute in Washington, D.C. "If you like the investment options you have, you may want to leave it there."

This approach may be appealing to older workers, in the 50-plus range, who are not anxious about moving their money around as their retirement draws closer.

Cleaning out your desk


But you may not want to keep your money with the old company. You have less control over it, especially as time goes by and you move on to other jobs and locations. And if your old employer's plan requires heavy investment in company stock, you may be even less enthusiastic about keeping your money there. graphic

In that case, you may want to transfer your assets to your new outfit.

One word of warning, however. Chris Carosa, president of Carosa, Stanton & DePaolo Asset Management in Honeoy Falls, N.Y., said if you ask your old company to cut you a check, you would be subject to a 20 percent withholding tax, since the Internal Revenue Service considers this distribution an early withdrawal.

The preferred way, Carosa said, is to arrange a trustee-to-trustee transfer, where your old company forwards the money to the mutual fund, bank, broker, or whatever entity is handling your retirement assets. "You never touch the money," Carosa said.

What's the 401(k)?


Once you've decided to take your money with you, you'll need to decide whether you should put your dollars into your new employer's 401(k) or roll the money over into an IRA. Again, both have their advantages.

"The administrative costs (of an employer plan) are frequently cheaper," Salisbury said. "It's generally going to cost you less money than an IRA."

Also, Salisbury said, an employer's plan often will provide educational tools, such as seminars, Web sites, software or other materials, while IRAs generally do not. And an employer plan normally will have cheaper distribution options than an IRA.

If your 401(k) has a loan provision, Salisbury said, you can borrow money from it to buy a home or finance your child's college education, something you normally cannot do if you leave your money in old company plan. Usually this kind of loan is repaid through payroll deduction

"You'll be paying interest back to yourself," he said. "You borrow from your own account, so you're paying back to your own account."

If you wish to borrow from your 401(k), the amount of the loan, plus any other loans cannot exceed $50,000 or one half the current value of your vested account, assuming you have less than $100,000.

Salisbury stressed he was not encouraging borrowing from a 401(k) plan, but suggested this would be preferable to cashing in an IRA and paying the taxes and penalties.

One scenario


Wayne Bogosian, president of the PFE Group, advised against borrowing from one's 401(k) plan. Bogosian, co-author of "The Complete Idiot's Guide to 401(k) Plans," said the move can be more costly than you realize.

"People end up losing the opportunity to continue investing their money," he said. "We look at what we saved by not having to borrow the money from a bank, but we forget the loss of opportunity of investing that money. It also creates a bad habit. We can rationalize anything when it comes to money."

graphicIn his book, Bogosian creates a situation to illustrate the impact of borrowing from a 401(k). Three people--Sue, Pat and Joe—each have a 401(k) plan.

Sue does not borrow from her plan, while Pat borrows and continues making contributions, and Joe borrows and stops making contributions. At the end of 30 years, Sue has $343,810, nearly $6,000 more than Pat and almost $60,000 more than Joe.

Rollovers


So that leaves the rollover. Steven Shagrin, president of the International Society for Retirement and Life Planning, said the IRA is the most flexible program, particularly if you go with a brokerage firm.

"If you go with an employer's plan, you may be limited by way of choices," he said.

Personal finance expert Lorayne Fiorillo also preferred going with an IRA.

"While a 401(k) is divine when you're working at a company," she said, "there's no real customization. But if you roll it over to an IRA, it can be completely customized and that can really help someone achieve their financial goals."

Weigh your options


And finally, a word about stock options. They're great for pulling people to a company, but what happens when an employee decides to call it a day? Carosa said each company has its own set of rules on how to handle stock options. 

"In general," he said, "you lose your options if you leave the company. The point of having options is to give employees incentive to do well in the company."

If the options are not vested, then you will get nothing for them. After all, they're called "golden handcuffs" for a reason—to keep you at a company.

Douglas Shackelford, a professor at the Kenan-Flagler Business School at the University of North Carolina at Chapel Hill, said most stock options have an exercise date, meaning they become worthless if they are allowed to lapse.

You also have to decide if losing your options is really a loss. If a company's stock is sinking, maybe you're ahead of the game.

"People say they tie you to a company and increase productivity," Shackelford said. "They can also be a way for a company that's short on cash to make compensation. Stock options were a great deal 20 years ago if you were working with Microsoft, but they weren't such a great deal if you were working for one of these dot.coms six months ago." Back to top

  RELATED SITES

International Society for Retirement and Life Planning

Challenger, Gray & Christmas Inc.

The Individual Trustees Home Page

Macmillan USA

The PFE Group

Kenan-Flagler Business School


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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.