Anya Kamenetz Generation Debt

Ok, it's cautionary tale time.

A good friend of mine graduated from college with a degree in computer science, and landed a great job at a telecom company in the late '90s. The job offered a good salary, lots of fun overseas travel, and a 401(k).

Fast forward about four years and my friend has left the job, enrolled in graduate school, and started a business -- without bothering to roll over his old 401(k) or even pay attention to the statements that came in the mail. Too bad the account was mostly invested in company stock, which had lost 90 percent of its value by the time he finally began to pay attention.

This is an extreme example, but the problem is all too common: Keeping track of your retirement accounts and keeping your overall portfolio balanced can be confusing as you change jobs, homes, and life paths. As young workers, we're in charge of our own retirement, and we're going to switch jobs an average of at least every four years, for a total of more than 10 jobs in a career. When making these transitions, the key is to never cash out your savings, and don't let them languish in old accounts either (if you do decide to keep your cash parked, make sure it's because you're getting a better deal -- and remember to keep track of it).

These are the most crucial saving years of our lives, when the time value of money is greatest, and you can avoid major, damaging losses by making sure your retirement savings stay current and stay with you. Here's what you need to know to keep things simple and up to date.

Most readers of this site should be familiar with the terms, but just in case: a 401(k) is a tax-sheltered retirement investment account provided by an employer, which may have an employer-provided match on contributions. An IRA or Individual Retirement Account is similar, only without any employer involved -- you can, and should, open one even before you take your first job, and you can have both a 401(k) and an IRA at the same time. The money you put in either type of account can be invested in any combination of stocks, bonds, mutual funds, etc.

Recently, Fidelity Investments, the nation's largest IRA and 401(k) provider, surveyed 20- to 40-year-olds and found that a disappointing 40 percent of them had cashed out their 401(k) when leaving a job. John Ragnoni, the company's Senior VP of retirement products, calls this decision a "retirement killer," which he explains with a simple example.

Let's say you somehow managed to pile up $50,000 in a 401(k) account. When you cash it out, 10 percent of the balance, or $5,000, goes to the IRS in the form of an "early withdrawal penalty" ("early" meaning you're touching that money before the IRS-approved age of 59 and 1/2). An additional $16,000 would go to federal and state taxes, leaving just $29,000, or 58 percent of the total savings in your pocket. Not a great investment move. No wonder over half of those surveyed regretted the decision.

If you're leaving a job, a much better option is to request a rollover into a new tax-deferred retirement account. If you have a new job with a new 401(k), you can ask your HR department for help in doing this. Normally, you'll contact the company that managed your old 401(k), fill out a form authorizing the rollover, and request a check for the amount; you'll have 60 days to deposit this into the new account.

Anyone, regardless of their employment status, can roll over into an IRA. To do this, first call up a brokerage such as Vanguard or Fidelity, and ask for their help in opening a rollover IRA. With this type of account, you can combine all your old accounts into one new one, which makes it a lot easier to have a properly managed and diversified portfolio. And when you start a new job, you can keep the old rollover IRA, without having to switch again and again.

When you're leaving a job and moving your money around, it's a great time to assess how balanced your portfolio is. Happily, the Employee Benefits Research Institute indicates that fewer folks, like my friend, are significantly overinvested in their own company's stock.

In 2006, average holdings of company stock in 401(k) plans accounted for 11 percent of total assets, down from 19 percent in 1996. However, 11 percent is probably still too much for any one stock. Instead, your portfolio should contain either a good target date fund (the simplest option) or a balance of low-cost index funds. The biggest proportion should be stocks, followed by international stocks, and bonds; in this precarious economy, a small stash of cash is good, too (say, 10 percent).

Many people choose to cash out their 401(k)s because they want to use the cash for something else -- for example, to make a down payment on a house or to pay off other debts. Please don't do this. Try saving and cutting down on other expenses instead. Because it is stashed in a special tax-deferred account to use for retirement, your 401(k) has value that other money doesn't have. One thousand dollars that you put in at age 25 could be worth $29,471 at age 75.

If you're saddled with high-interest debt, and you've exhausted other money-management options, consider taking a loan from your 401(k) before you simply cash it out. This is not a great solution, but it's better than cashing out because you do pay yourself back.

Rollovers are just one example that the key to success with retirement planning is to keep it simple: have as few accounts as possible, set up painless automatic contributions, and adjust a few times a year.

"I think the biggest hurdle for savings today, especially for young investors, is that they get overwhelmed or they're too busy," says Ragnoni. "It can become relatively painless when you pay yourself first and set it and forget it."