Like many American workers, Paul Watford has changed jobs several times.
With each job change, he has made sure that the nest egg he had accumulated by participating in his employer's tax-deferred retirement-savings plan remained in such an investment vehicle after his departure.
Twice, he left his balance to grow in the former employer's plan. Two other times, he rolled over his balances into individual retirement accounts.
Not once did he consider taking the balance as a cash distribution, as departing workers are entitled to do, albeit with a stiff price tag in taxes and penalties.
"It's for retirement," said Watford, director of financial planning and analysis for the Sears Tire Group in Hoffman Estates, Ill. "I've never been tempted to touch it, not at all."
Now, at age 40, Watford says he should be able to retire in 15 years, thus realizing a goal he has had since college graduation: to retire before 60.
Watford's disciplined approach is a case study in doing things right, financial planners say.
Growing numbers of Americans appear to be catching on to the wisdom of this approach, but a strikingly high percentage still prefer "to take the money and run," according to a study released recently by Hewitt Associates, a Lincolnshire, Ill.-based management consulting firm.
Hewitt found that 57 percent of participants in 401(k) retirement-savings plans took cash payments when they changed jobs last year, down from 64 percent five years earlier but still a high rate.
"It is still quite alarming to see that many participants view the cash payment as a sudden windfall. That's a big mistake," said Mike McCarthy, a 401(k) consultant at Hewitt.
Financial counselors say it's a big mistake on two counts, loss of potential for investment growth and immediate loss of funds because of taxes and penalties that must be paid.
Under 401(k) plans, employees contribute pretax earnings to investment accounts. Employers often match contributions.
Employees then select from investment options, including equity mutual funds, company stock, bonds, insurance contracts and money market funds.
The most appealing point is that the return on these investments can compound tax-deferred. Taxes needn't be paid until a distribution is taken.
A balance of $5,000, for example, will grow to $50,000 in 30 years, assuming an annual rate of return of around 8 percent.
By taking a cash distribution when leaving a job, an employee is giving up that potential growth.
"What people are using for retirement security when they spend their 401(k) money is a mixture of hope and fatalism," said Teresa Ghilarducci, associate professor of economics at the University of Notre Dame in South Bend, Ind.
The second half of the double whammy comes after an employee takes the cash. Taxes, and an early-withdrawal penalty that applies to employees younger than 59 1/2, can eat up nearly half of the cash distribution.
An estimated 6.5 million workers paid taxes on more than $65 billion in plan distributions last year and spent it or invested it on an after-tax basis, according to research by Spectrem Group, a consulting and financial services research firm in Windsor, Conn.
Employees generally have three options for keeping their distributions in a tax-deferred environment. They can roll them over into an IRA or their new employer's plan. Or, if their balance is more than $5,000, they have the option of leaving it in their former employer's plan.
The Hewitt study found 37 percent of 401(k) plan participants who took distributions rolled them into IRAs last year, up from 31 percent in 1993. Six percent rolled over their balances into the new employer's plan, up 1 percentage point from 1993.
As might be expected, job-changers with bigger balances tend to take tax-deferred routes, while those with smaller balances go for the cash, the Hewitt research found.