Don't be dumb -- don't cash out your 401(k)
By Laura Bruce • Bankrate.com

We all do dumb things now and then. Sometimes it doesn't really matter, but other times we find ourselves days, weeks or years later wishing we'd made a different decision. Cashing out a 401(k) before retirement will likely have you kicking yourself some time in the future.

A survey by Hewitt Associates, a human resources consulting firm, shows that 45 percent of employees take a cash distribution of their 401(k) plans when they leave a company. That's long been a problem with twentysomethings as they job hop and cash out of small-balance 401(k)s. But the Hewitt survey uncovered a more-disturbing fact -- 42 percent of workers age 40-49 take the money and run. How stupid is that?

They're not cashing out paltry, insignificant amounts, either. Nearly one-third of employees with balances between $10,000 and $20,000 say, "So long, 401(k); show me the money!"

"These people are serial consumers of their 401(k)," says Lori Lucas, director of participant research at Hewitt. "It was somewhat surprising to see people age 40-49 cashing out. It's surprising to see people closing in on retirement who aren't preserving their wealth.

"People in their 40s may think they have balances that aren't worth preserving. That's not a good way to think. Even in your 40s there's still plenty of time for small balances to grow much bigger by retirement. They may have felt the need to use the money for other reasons. Maybe they left one job and didn't have another to go to right away. But some people look at it as a bit of a windfall and use it to buy those things they've wanted -- like a big screen TV."

Serial consumers of 401(k)s have plenty of opportunities to break the piggy bank. The federal Bureau of Labor Statistics says the median number of years that all workers have been with their current employer is four. That number is referred to as "tenure" by the bureau. The median tenure of workers age 25-34 is 2.9 years and 9.6 years for workers age 55-64.

If you're fired and you don't have another job to go to, the cash in a retirement plan can be a lifesaver and perhaps keep you out of bankruptcy. But that's why Bankrate pounds the table on the subject of building an emergency fund.

Personal finance is a pyramid with your ultimate goal at the pinnacle. You can't get there if the building blocks -- savings for everyday cash, vacations, college, an emergency fund and retirement plans for retirement -- aren't there.

But the worst scenario is when people leave one job for another and cash out to buy that big screen TV or to finance a dream vacation to Aspen, Colo., the Caribbean or Majorca. Live within your means. How much sweeter is a luxury like that when you've saved the money and it doesn't bust the budget or set back your retirement?