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Over 25% of 401Ks Tapped to Pay Current Bills
Townhall.com ^ | January 16, 2013 | Mike Shedlock

Posted on 01/16/2013 3:13:05 PM PST by Kaslin

At an increasing rate, even during the alleged recovery, consumers are tapping their 401Ks to pay current bills according to a study by advisory firm HelloWallet as describe in the Washington Post article 401(k) breaches undermining retirement security for millions.

A report due out this week from the financial advisory firm HelloWallet found that more than one in four workers dip into retirement funds to pay their mortgages, credit card debt or other bills. Those in their 40s have been the most likely culprits — one-third are turning to such accounts for relief.

The withdrawals, cash-outs and loans drain nearly a quarter of the $293 billion that workers and employers deposit into the accounts each year, undermining already shaky retirement security for millions of Americans.

Fresh data from Vanguard, one of the nation’s largest 401(k) managers, show a 12 percent increase in the number of workers who took loans against their retirement accounts or withdrew money outright since 2008.

In 2010, 28 percent of participants reported having an outstanding loan against their retirement accounts, an all-time high, according to a survey of 110 large employers by Aon Hewitt, a human resources consultancy. And nearly 7 percent of employees took hardship withdrawals that year — roughly a 40 percent increase since the recession, while 42 percent of workers cashed out their plans rather than rolling them over when they changed jobs.

“401(k)s are not being used for retirement by a large and growing share of workers because they are misaligned with the very basic financial problems most workers face and must address,” said Fellowes of HelloWallet, which provides benefits advice to companies.

Using data from the Federal Reserve’s Survey of Consumer Finances and the Survey of Income and Program Participation, conducted by the Census Bureau, the report said 30 percent of households earning less than $50,000 a year had cashed out a retirement plan for non-retirement purposes. Only 12 percent of households earning between $100,000 and $150,000 a year and 8 percent of those earning more than $150,000 a year have cashed out a retirement account, the report said.

“The investment advice out there needs to recognize that a large share of participants is not going to use the money for retirement, so they should not be exposed to risky investments,” Fellowes said. “There is no investment adviser in the country who would put workers in the stock market if they were told the money being invested was for short-term needs.”
Mortgage Connection?

The Washington Post article failed to note "why" people were tapping their 401Ks.

I suspect, but cannot prove, that many low-income households are desperately clinging to their underwater houses, from which they would be better advised to seek council, then walk away.

Higher income groups seem to have less aversion to walking away than those who struggled all their lives to get a home, only to get one at exactly the wrong time.

Dead-Fish Assets 

The mentality "My house is the only thing I have" is tough to fight. However, the reality is many homes are worth less than zero because of underwater situations.

Unfortunately, the financial industry is geared to giving the worst advice to the least well off. Counseling groups (typically bank-sponsored) encourage people to keep their dead-fish "assets", best flushed down the toilet.

There are other possible reasons of course, and right at the top of the list is car loans, another depreciating asset.

Lose Your Job, Then You're in Trouble

I do not advise tapping your 401K for numerous reasons, but right at the top of the list is the lost-job nightmare.

Please consider these problems as excerpted from the 401K Calculator article Everything You Need To Know About Borrowing Against Your 401K.

  1. If you lose your job or if you decide to leave your employer, you will be required to pay off the loan in a lump sum. If you don’t, you face the potential of the loan defaulting, which will result in a taxable event.
  2. As you pass-up the tax-free compounding of the money you withdraw, you could end up with a significantly smaller fund on your retirement.
  3. Interest payments from a 401(k) loan are not tax deductible. 
  4. You will also pay taxes twice on the amount you took out for a loan.  Your 401k loan payments are deducted after taxes have been taken out of your paycheck. However, since pre-tax money is usually used to fund a loan, the payments are put back into your 401(k) as pre-tax funds. This means that when you take the money out later, you will have to pay taxes on it again.
  5. There is no flexibility with the terms of repayment and your loan repayment is done automatically through payroll deductions, which will reduce your take-home pay.


Recommended Options

401K Calculator writes "Before you take out a 401k loan, it’s vital that you explore other options. Using savings or other types of loan may be a more suitable alternative to borrowing against your retirement funds. You should be careful not to jeopardize your retirement just for a quick cash fix now."

I concur, while adding ... If the reason for the loan is to make a mortgage payment on an underwater home, or if you are for any reason close to bankruptcy, please consult a bankruptcy/mortgage attorney in your state for other options.

"Walking Away" and/or bankruptcy may be far better options than tapping 401Ks.

Unfortunately, I highly suspect many have trashed their 401K to keep or buy rotten fish. Most of the rest are likely bankrupt and on borrowed time, wasting their 401K in a futile attempt to prove otherwise.


TOPICS: Business/Economy; Editorial
KEYWORDS:

1 posted on 01/16/2013 3:13:08 PM PST by Kaslin
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To: Kaslin
The withdrawals, cash-outs and loans drain nearly a quarter of the $293 billion that workers and employers deposit into the accounts each year, undermining already shaky retirement security for millions of Americans reduce the 0bama administration's opportunity to confiscate American's 401k's under the guise of "fairness".
2 posted on 01/16/2013 3:22:32 PM PST by Hardastarboard (The Liberal ruling class hates me. The feeling is mutual.)
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To: Kaslin
Keep you 401! Live in your car!

Seriously, if you are hitting your 401K for cash you either no long believe the stock market will be functioning in the near future... or you have already tapped all other assets and you need the cash to survive. Either way, its somewhat insulting to scold them. Its going to get a lot worse than this. And I'm the optimistic one in the room!

3 posted on 01/16/2013 3:26:15 PM PST by Casie (Chuck Norris 2016)
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To: Casie

Yuck. Sorry about all the typos. Cat helping.


4 posted on 01/16/2013 3:28:50 PM PST by Casie (Chuck Norris 2016)
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To: Kaslin
How long will it be before Obama signs an executive order to confiscate 401Ks...We already know the Republicans won't do anything to stop him.


5 posted on 01/16/2013 3:32:23 PM PST by darkwing104 (Let's get dangerous)
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To: Kaslin

Why don’t all these people just raise their debt ceilings??


6 posted on 01/16/2013 3:37:54 PM PST by cotton1706
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To: Kaslin

I’m living off of my 401k. Does that make me a bad person?


7 posted on 01/16/2013 3:44:25 PM PST by BipolarBob (Happy Hunger Games! May the odds be ever in your favor.)
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To: darkwing104

Don’t give him any ideas


8 posted on 01/16/2013 3:45:53 PM PST by Kaslin (He needed the ignorant to reelect him, and he got them. Now we all have to pay the consequenses)
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To: Casie

Eat, drink, and be merry, for tomorrow your 401K’s will be confiscated.


9 posted on 01/16/2013 3:49:55 PM PST by HotKat (Politicians are like diapers; they need to be changed often and for the same reason. Mark Twain)
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To: Kaslin

I cleaned out one of my (well-funded) IRAs to pay off my house. I also figured that tax rates would never be lower and that the government WILL have to seize retirement accounts in the near future, just to be able to reset the clock on the national debt...which otherwise cannot be sustained.


10 posted on 01/16/2013 3:50:21 PM PST by BobL
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To: darkwing104

Which is why I’m watching and thinking about grabbing mine - nothing to do with bills. Of course, I’m sure that when they do it’ll be retroactive.


11 posted on 01/16/2013 3:50:46 PM PST by mykroar ("I'm afraid I can't use a mule. I have several hundred up on Capitol Hill." - Ronald Reagan)
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To: Kaslin

You shouldn’t tap into your 401K until you really retire. I won’t tap into my TSP (401K equivalent for federal employees/retirees) for quite a long time. I’m letting it grow, which it has done quite well since I retired two years ago.


12 posted on 01/16/2013 3:56:57 PM PST by Poundstone (A recent Federal retiree and proud of it!)
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To: Casie

“Keep you 401! Live in your car!”

I doubt people can understand what you wrote, so I’ll help a bit.

The US debt is GIGANTIC. There is no way that we will ever make progress paying it down. We have half of this country that are pure takers (welfare and everything related), and we even have half of us FReepers as almost-pure takers (i.e., “don’t you dare touch my Social Security”).

So our deficits continue, our debt is TOTALLY unmanageable, but there remains a HUGE pot of gold in retirement accounts - enough to cover the ENTIRE national debt, and them some (probably).

So the feds know this, and they know that they MUST get their hands on the money (as opposed to telling FReepers that the country is really, really, broke). So they TAKE the money and replace it with an annuity (i.e., a monthly payout, like Social Security). That will work for another 5 to 10 years (at which most can retire), but after that, we’re STILL broke and spending like mad, and have no more pots of gold - and then we collapse, and INFLATION finally sets in, and all our money is worth, maybe 25 cents on the dollar (at best, 10 cents in other countries that have been through this) - and the idea of buying a plasma next year goes away - and the dream will be affording some meat so our kids don’t look quite as gaunt...


13 posted on 01/16/2013 4:00:16 PM PST by BobL
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To: Casie

I haven’t drawn mine down, but I stopped contributing to it when I realized that using plastic for groceries now for something 30 years down the road made no sense. I’m paying down debt, but if I ever am able to contribute again I wouldn’t go any further than the company match.

I have no doubt that one of the fixes for social security is that it will be based on means, and the grasshoppers will be whooping it up after setting aside nothing with money set aside by the ants (while the ants get reduced payments because they’re “rich”). People have to adjust to the current socialism by getting as far off the grid as possible; I know there are limitations as to what can be done, but playing by the rules has turned into a sucker’s game in which the sucker too often watches his/her hard-earned money given to useless garbage.

Contrast the Katrina response to the Sandy response; Sandy happened to “wealthy white people” as far as the government and their media are concerned, and the response has been predictably sluggish.


14 posted on 01/16/2013 6:19:24 PM PST by kearnyirish2 (Affirmative action is economic war against white males (and therefore white families).)
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To: darkwing104

“How long will it be before Obama signs an executive order to confiscate 401Ks...We already know the Republicans won’t do anything to stop him.”

My first thought when I saw this story was, they might as well spend it because the government WILL take it eventually. Or inflation will eat up.


15 posted on 01/16/2013 7:08:31 PM PST by suthener
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To: BobL
Exactly. Good post, BobL.

The best thing you can do now is simplify your life as much as possible, become as self sufficient as you can. Shop second hand via Craig's List and garage sales when prudent. And understand that when they sold you that 401k and told you it was going to be comparable to a traditional company pension, they lied to you.

Before the election we had our 401ks positioned aggressively, heavy in stocks. Now we are 100% tax advantage municipal bonds (State Farm calls it TABs). Was it a smart move? I have no idea. I'm just hoping it makes enough to barely keep up with inflation while offering some small protection from an inevitable catastrophic stock market correction.

But honestly, the future of all 401ks look pretty bleak. I don't know about you, but I was told my money would double every ten years. What a freaking joke. I would have done infinitely better if I had invested a monthly sum into buying a little silver or gold.

Will Obama reach out his evil greedy fingers and scoop up all our 401ks? Not openly. But he may cause the biggest stock market crash in our lifetime. And just when people are the most destroyed, he will step in and offer his hand, like God reaching down to Adam. He will declare that in order to protect your retirement accounts from this kind of disaster ever happening again... all 401ks will be required to contain a high percentage of Government Bonds. And people will THANK him for it. And just like that, our retirement is yet another tool of government control over our lives.

Ah! I get so depressed when I think to much about it!

But if you have any further advice I'd certainly be interested. I try to stay prepared and informed, but honestly most of the time I feel like we are all being drug along helplessly.

I did learn one single positive thing about this financial disaster. We plan on stying in our home long long term. And we have stopped sending extra payments. We no longer want to pay the note early. At least when inflation destroys the value of our savings, the same number of dollar bills will still pay a house note.

Look! I wrote a book! I sure don't blame you if you decide not to read this. :p

16 posted on 01/16/2013 10:52:30 PM PST by Casie (Chuck Norris 2016)
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To: Casie

I wouldn’t call that a book. Read my home page if you want that (i.e., there’s a reason why FR is slower these days...LOL).

Yea, it was a tough call for me, but I ultimately went the other way and decided to pay off my mortgage. I was paying 5% on it, and not getting a red cent on my savings or one of my IRAs. So screw it, I get 5% by paying down my mortgage. I ended up cashing out a rather large IRA last year after deciding to eat the 10% penalty. I simply don’t want that money available for their taking later and I know that no one, at least here in Texas, can touch my house (as long as I keep up with taxes).

I only wished I had done this earlier, as I probably lost $15k just twiddling my thumbs the past few years.


17 posted on 01/17/2013 5:29:11 AM PST by BobL
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To: BobL
Yep. I wish we were closer to having ours paid off and could do the same. I'm so jealous! We still owe 30k (29,900!) and that puts it right out of our reach. So we are going to drag it out and try to invest in other things that will make us feel more prepared for what will come. The pantry is stocked up good. Now the hubby wants to build a proper deck on the roof so he can hunt squirrel off the second floor balcony. I might just let him!

Gonna check out your home page!

18 posted on 01/17/2013 8:20:50 AM PST by Casie (Chuck Norris 2016)
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To: BipolarBob

“I’m living off of my 401k. Does that make me a bad person?”

If you are below retirement age, yes. Very bad. Awful, wicked, reprehensible.


19 posted on 01/17/2013 8:24:13 AM PST by AppyPappy (You never see a massacre at a gun show.)
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To: BobL

It’s 10% PLUS your current tax rate which is probably higher than when you retire.

I find that people pull money out of 401K’s for another reason. They can’t stand the thought of having money and not spending it. Why else would you rather lose 40% of the account rather than make 5%?

“Yes Mr Bob, if you invest with me, I can promise a -40% return. You are guaranteed to lose money with me”
“Well slap my ass and call me Sally. Where do I sign?”


20 posted on 01/17/2013 8:28:46 AM PST by AppyPappy (You never see a massacre at a gun show.)
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To: AppyPappy
If you are below retirement age, yes. Very bad. Awful, wicked, reprehensible.

And what, pray tell, is retirement age?

21 posted on 01/17/2013 8:30:09 AM PST by BipolarBob (Happy Hunger Games! May the odds be ever in your favor.)
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To: BipolarBob

The age when you can receive 401k distributions without penalty.


22 posted on 01/17/2013 10:58:39 AM PST by AppyPappy (You never see a massacre at a gun show.)
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To: AppyPappy
The age when you can receive 401k distributions without penalty.

Wait a minute, the government decides about the penalty. So you trust the government to decide when we should retire. What if they raise it? What if they decide NEVER is a good time for you to retire?

23 posted on 01/17/2013 11:40:24 AM PST by BipolarBob (Happy Hunger Games! May the odds be ever in your favor.)
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To: AppyPappy

“Why else would you rather lose 40% of the account rather than make 5%?”

““Yes Mr Bob, if you invest with me, I can promise a -40% return. You are guaranteed to lose money with me””

Dinner time now...between my legs...have at it.

How about you treat people with a bit more RESPECT on this sit, particularly when you don’t know their details?

In my case, I can PROMISE you that I will, at least, be in the 25% bracket when I retire, simply because I have a REAL pension coming to me. So your 40% hit just dropped to 15%. From there, it winds up closer to 10%, due to my specifics.

You may be MORE THAN HAPPY to have your IRAs turn into “Annuities”, but I am not, and I will take steps, even costly ones, to NEVER let that happen. I will soon OWN my house here in Texas and NO ONE from the government will be able to do jack about it.


24 posted on 01/17/2013 4:41:25 PM PST by BobL
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To: Casie

“Yep. I wish we were closer to having ours paid off and could do the same. I’m so jealous!”

Yea, but you’re so cool, you can do it. Just STOP spending money on ANYTHING that doesn’t pay for itself. For example, the McDonald’s Dollar Menu, at least for their McDouble, in my book, pays for itself (not just the cost of food, but the energy to cook it and the cost to clean up)...so good investment. But fries, and especially, drinks, NO WAY. And don’t even get near eating out (other than McDoubles) during work, or Starbucks.

It’s a lifestyle change, but only for a short time. Live like crap...look at what it really costs for food that good enough to live on...and go with that. Pasta and rice is still cheap. Mix it with some other (better) stuff and you’re set.

Keep at it!!! At 30K you’re in the HOME STRETCH. Push it through and the payment is GONE...maybe very soon (and make sure they send you the lien release).


25 posted on 01/17/2013 4:49:52 PM PST by BobL
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To: BobL

“Dinner time now...between my legs...have at it.”

I’m a guy. You may be into having sex with men but I am straight. So, you need to move to the next guy.


26 posted on 01/17/2013 4:54:25 PM PST by AppyPappy (You never see a massacre at a gun show.)
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To: AppyPappy

Just responding in kind, no prob. if you’ve changed from yesterday.


27 posted on 01/17/2013 5:34:03 PM PST by BobL
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