Younger adults with small retirement accounts are prone to small cash-outs, which can significantly impact retirement income, data shows.

Deciding what to do with their retirements account is a challenge many people face when changing jobs. They can choose to remain in their current plan (if the former employer allows), roll over their balance to a new account, cash out or do a combination of these. Of these options, cashing out is the most common choice, especially among those with account balances below $5,000.

According to a study, four out of five (80%) people with an account balance of less than $1,000 cashed out, and 62% of people with a balance of less than $5,000 cashed out. A main reason for such a high rate of cash-outs among small accounts is that employers will automatically cash out balances under $1,000. While these may seem like small amounts of money, it can have a sizable impact on the amount of money saved at retirement.

Alight Solutions looked to see how much could be lost from early cash-outs. They assumed savings would start at 22 years old, interest would be 5% annually, employers would match contributions at a 50% rate and the worker would retire at age 67. With no cash-outs, the total balance at retirement would be $484,000. A single $3,000 cash- out at age 24 would result in a $23,000 loss in savings at retirement. Two more cash-outs at ages 26 and 28 of $4,500 and $5,000, respectively, would result in a loss of $91,000. This equates to roughly 19% of the total balance without a cash-out.

While these losses are already quite significant, they could prove to be much larger. Cash-outs of the same amounts but with an 8% annualized return would result in a loss of $295,000, or 61% of the total retirement balance would be lost.

Source: “The Impact of Small Amount Cash-Outs on Retirement Income,” by Rob Austin, Anthony DePalma and Landis Cullen; Alight Solutions, 2021.

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