While cashing in the 401k was probably the most blatantly stupid financial decision, another decision Mr. Frugal Source made for the wrong reasons is in competition for the greatest negative impact on our ability to retire “early”, and possibly eclipses it.
When I was a relative youngster (mid 20s), I found a secure job writing software for a bank. This was the same job I left just before cashing out the 401k. The cash-out notwithstanding, the decision to leave that employer, in it’s own right, hugely impacted our retirement timeline. Why is that? One word. Pension.
While most employers had already been phasing out pensions from their benefit offerings, this employer was still offering a lucrative pension. How lucrative? Well, had Mr. Frugal Source been able to stick it out for a full 40 years — this was doable, as he started in his mid-20s — he would have retired with 100% of the average of his highest three (3) years salary in that time. The 401k, which matched 100% up to 6% of salary, was gravy. These days, there are still pensions out there, and there are still good 401k matches, to find both together would be nearly impossible.
Had I stayed, Mrs Frugal Source and I would likely be pretty secure in our ability to retire earlier than most, even considering the other mistakes we’ve made along the way, and even considering she made the choice not to work outside the home very frequently during those years (trust me, what she chose to do was way more time-consuming and difficult than any job I’ve ever had). Even if I couldn’t have stuck it out for the full 40 years (spoiler alert, there is NO way), were I still there, I would be looking at retiring early just over a year from now with around 68% salary plus that 401k I wouldn’t have been able to cash out — aving grown with contributions, a great match, and the market for another 12 years — as gravy.
Let’s let that sink in for a moment… nearly 70% salary for doing nothing, and a healthy 401k waiting for “real” retirement age. I could have taken a few weeks off and gotten a new job with a similar salary. I could have even gone out on my own as a consultant without great risk, having such a solid safety net in place. I could have chosen to hang on to the ripe old age of 50 (that’s when my grandfather retired) to pad that percentage and earn a few more bucks while the nest emptied and just be content with 70%-75% salary while we enjoyed the rest of our lives together.
I still occasionally get a bit queasy when I think about it from strictly a financial perspective, though not nearly as often as I used to. In fact, writing about it here helps a bit too. First, because I get to process it a bit more and. Second, and more importantly, I have the hope that my writing about it may help others avoid similar mistakes.
Now, to be clear, leaving that employer wasn’t the real mistake, in and of itself. I have purposely left out motivations, to this point, to clearly outline the financial implications of the raw decision and its timing. This clinical separation of cause and effect is one of the means whereby I hope to help others who find themselves in similar situations, as those clear lines are needed to do the cost benefit analysis one should always do when making these sorts of decisions (and, frankly, that I’ve failed to do almost every time — I’m learning).
Why did I leave? To be blunt, I thought I was wise, but quite the opposite was true. I had (correctly) realized the housing bubble was about to pop. Not because I’m some financial genius (if you’ve read this far, you’ve realized at least that much) but, as one who reads quite a bit, I found commentators sounding the alarm with clear, logical reasoning based on fundamental facts. This concerned me, as mortgages were near and dear to our business model.
With the impending crash in mind, coupled with the fact that the flow of work coming to myself and others on my team had slowed to a trickle, I was sure that my layoff was just around the corner. As a matter of fact, I gave notice on a Friday; the following Monday, about 5% of our staff was laid off. At the time, this reinforced my belief that I had made the right decision, an I moved on to my next job without thinking about the implications for a while.
Although I’ll not have the opportunity to do it over, would I? If I could send myself a fax from the future all these years later, would I take the leap again, or would I stay put for financial security? Come back next week to get the answer and the reasons behind it.