Becoming Financially Independent Part 2: Do Not Disturb Accumulation, Do Not Overlook Consolidation - Rodgers & Associates

Becoming Financially Independent Part 2: Do Not Disturb Accumulation, Do Not Overlook Consolidation

Spending money that has been accumu­lated for financial indepen­dence extends the time it will take to achieve a goal.

Too many people procras­tinate on saving and investing because they believe they have plenty of time—and other prior­ities get in the way. People in their 20s believe retirement is a long way off, and that it’s something for older adults. The goal should be to become finan­cially independent so that you can choose whether or not to work. Psycho­log­i­cally, changing the goal from “retirement” to “financial indepen­dence” makes it more immediate and more exciting to pursue.

Our previous article began a series on the eight principles for achieving financial indepen­dence. Here are the next two principles:

Principle 4: Never disturb the funds that have been accumulated.

Do not spend money that has been accumu­lated for financial indepen­dence. Invading long-term savings extends the time it will take to achieve a goal. Money spent can no longer grow and compound. Assuming a 7% rate of return, $15,000 spent today could have grown to $114,000 in 30 years. Using the 4% rule, that amount of savings could provide $4,500 of income per year toward financial independence.

Another trap some people fall into is accessing savings by borrowing against them. The rationale says the money is not spent because it is only used for collateral. Loans are a popular feature of 401(k) plans. Funds can be borrowed from a 401(k) account for almost any reason, as long as the employer permits plan loans. Is it a good idea to borrow from a 401(k)?

When money is borrowed against a 401(k) account, the custodian moves the amount of assets securing the loan to the “safe” option within the plan. This option is usually a money market fund. The interest rate on money market funds today is well below 1% (probably much closer to zero).1 One of the hidden costs of borrowing from a 401(k) is the money that isn’t earned while the assets are held in a low-interest, safe option.

Another problem with this type of borrowing is that many employees who take loans stop making contri­bu­tions until the loan is repaid. The missed contri­bu­tions are rarely made up, and the loss of matching contri­bu­tions can never be recovered. The impact on a retirement plan could be significant.

In most cases, 401(k) loans are used to fund overspending. Anyone consid­ering borrowing by using current savings for collateral should go back and review principle number one.

Principle 5: Roll over and consolidate.

Funds held in employer-sponsored retirement plans are usually restricted until the employee retires or separates from service. Many people think of retirement savings as a windfall of available cash when changing jobs. It might be challenging to resist the urge to take that money as cash, especially if a layoff caused separation from service. However, this is a costly source of funds. The current cost is in the form of income taxes and penalties. Distri­b­u­tions from a company plan are generally subject to federal income taxes and state income taxes (if applicable). Anyone under age 55 could also pay a 10% penalty on top of the tax. These costs can cut into savings signif­i­cantly and lengthen the time it will take to achieve financial independence.

Most employer plans provide options when an employee separates from service. Instead of taking a check subject to taxes and penalties, options may include:

  • Leaving savings in the existing plan.
  • Rolling the savings over to an IRA.
  • Rolling the savings over to a new 401(k) with a new employer.

Deter­mining the best option depends on several factors, but consol­i­dating retirement accounts is often a smart choice. Consol­i­dating retirement funds provides for:

Less Record Keeping: Fewer monthly state­ments, fewer emails, and not as many forms at tax time.

Coordi­nated Invest­ments: Coordi­nating a well-diversified portfolio is more difficult when retirement funds are held in different places.

Reduced Expenses: Consol­i­dating retirement accounts could reduce the amount of fees when accounts are held separately.

Simpler Estate Admin­is­tration: Anyone who has ever settled an estate under­stands how challenging it can be to make sure all the accounts belonging to the deceased have been identified. More accounts typically mean more work and more complexity!


  • Avoid spending funds that have been set aside for long-term savings goals.
  • 401(k) loans are not a cheap source of funds. The costs are high when consid­ering the lost oppor­tunity to grow.
  • Savings held in a former employer’s plan can be rolled over to the new employer’s plan or a rollover IRA.

Read the series: Part 1 | Part 3

  1. According to data from the FDIC, the average money market interest rate is 0.07% APY as of December 31, 2020. 

Origi­nally posted August 2012