This may actually be a smart move.
Posted on 06/10/2011 12:31:19 AM PDT by Nachum
About a year ago Zero Hedge posted an article titled: "Record Number Of Americans Using Retirement Funds As Source Of Immediate Cash" after a report by Fidelity uncovered that "plan participants with loans outstanding against their 401(k) accounts had reached 22 percent versus 20 percent a year earlier." It is now time to revisit this very important topic because if recent press reports are true, last year's record number has just increased by another 50%. "On "The Early Show" Thursday, financial journalist and Newsweek columnist Joanne Lipman said, "Right now we have 30 percent of people who have 401(k)s have loans against their 401(k)s, which is a historic high. And the problem is, it's growing like crazy: By 2014, we're expecting to see 30 million people take loans against their 401(k)s." The raiding of the last ditch piggybank is on, and who can blame them? With banks setting the example of always reverting to the Discount Window (or the Excess Reserve stash as is now trendy) when in trouble, ordinary working Americans are merely following in the footsteps of their financially more "literate" betters. Unfortunately, unlike the "depositor" institutions, nobody will replenish these funds should they not be repaid and the retirement money is gone for good.
CBS News explains why raiding your 401(k) is so easy a caveman can do it:
Sheri Chaney Jones, of Columbus, Ohio, started a consulting business in October and borrowed from her 401(k) to help pay her bills.
"It was extremely easy,' she told CBS News, adding that her financial planner told her "she was seeing more and more people" do it, "because the banks were not giving loans out traditionally to small businesses anymore."
"It's not right for everyone," Jones noted, " but it is your money, you can borrow from it tax-free, you do pay yourself back at interest, but a very low interest, much lower than maybe a traditional bank."
Just like Wall Street sellside research, delusions are rampant:
"What I feel optimistic about," Jones says, "is that I will be able to grow this business to not only pay myself back at the current interest, but continue to contribute more toward the 401K than I would have if I would have stayed where I was."
And for those wondering why doing a 401(k) raid is the worst possible idea:
"It's a big, big problem," she remarked to co-anchor Chris Wragge, "and it's one that's really been under the radar. And the big problem is that, if you lose your job, you have to pay that loan back within 60 days. So suddenly, you have no income, you owe all this money back, and the fact is that most people are unable to pay it back.
"There was a survey recently that found that 70 percent of people who lose their jobs are unable to pay back the loan and go into default. And the number is even higher ... for young people -- it's closer to 80 percent."
It gets worse: "If you go into default," Lipman pointed out, "you've just raided as a piggybank your 401(k), you don't have retirement funds and you owe taxes and penalties."
Step aside HELOCs, here comes the pension money for iPad exchange:
Still says Lipman, "There are certain times when it makes sense. If you're secure in your job, if there is a one-time expense -- let's say you need money for a down payment on a home, that's fine. You know, that makes sense. Or for education, for medical expenses. You know, that can make a lot of sense. Because you are paying yourself back. And if you can stay on track, you're fine with that.
"But the problem is, when you use it as a piggybank. When people are using this to pay for a vacation, to pay for a home that's perhaps larger than they can afford - that's where we really get into trouble."
Luckily, Americans have demonstrated beyond a reasonable doubt that when it comes to abusing rainy day capital to satisfy trivial material needs, there is nothing to worry about. Nothing at all.
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I think the better action would be to live within your means before considering loans.
Or perhaps, you pretentious asses, the American people have finally realized that their financially more "literate" betters, are using their "superior" connections...oops, ahem...I mean "knowledge" to figure out brand new ways to relieve them of the balance of their accounts, and have found a better investment. Couldn't be that now, could it?
Grandpa bought farm ground during the Depression for $50/acre. God, what a tragedy that he didn't invest in the "market" so that his betters could take care of his money...LOL!
retirement is a thing of the past. our life as we know is gone.
I wonder what percentage are under water (account value fell to less than value of the loan) ?
I wonder of those how many just defaulted on the loan and disappeared ?
Nobody forces these poor people to borrow against their 401K’s. And, that is not to say that it is the major part of their retirement...I don’t trust the government enough to use their 401K or IRA schemes. I just invest for myself, thankyou...
Life is risky...each individual decides for themselves what level of risk is comfortable. Each individual is responsible for their own production and property. There is nothing government can do about that without destroying wealth.
It soon won’t matter. The paper money will disappear through either hyperinflation or the collapse of the currency. It won’t matter if it is in a savings account, insured CD, government bonds, or the stock market.
We are experiencing the collapse of Western Civilization.
Always the optimist! /s
This is a huge potential problem in this 0bama economy. You could walk into work one day, find you've been downsized then, oh by the way that $50K loan you took, it's due in 60 days or you get severe penalties from the IRS.
I've come to that conclusion myself. Over the last 2 years being on again off again employed I've set up an account where I take a couple hundred $ a month out automatically while I'm working and put it into an account that isn't easy to tap. When the hot water heater went, I had the money to pay cash and I even got the plumber to accept cash with no receipt in return for a nice discount on the job. A win-win from my perspective.
Spot on true.... Live within your means be times good or bad and life will be easier.
May as well take it now because we’ll be lucky if it’s there or if it’ll be worth anything in 5 - 10 years.
It’s a big problem because the government can’t outright confiscate it if it’s not in your 401K...
1. I got a much better interest rate on these loans than I ever could have gotten through traditional bank financing.
2. I used my cash in my 401(k) account and cashed out a big chunk of my bond mutual fund in my 401(k) plan for this loan. I was getting a very small return (less than the interest on the loan) on those things.
3. Since the loan is used for business purposes, the interest is tax-deductible.
4. So, in effect, I've taken out a loan where the interest payments are tax-exempt, and I'm paying myself back and getting a better "return" on the money than I would have gotten if I had left the money in the 401(k) plan.
5. Another minor consideration is that the remainder of the funds in my 401(k) plan serve as collateral for the loan. If the economy collapses, or by some small chance the U.S. government starts seizing 401(k) accounts from private citizens, then I have no qualms about defaulting on the loan, walking away, and leaving Uncle Sam and the 401(k) custodian to fight over who gets the remaining crumbs.
The Org that I work for has placed every restriction you possibly could on our 401’s. No cash out or loans, no nothing till 59. I think they were very smart to do this.
Conceptually speaking, I agree with you. If you’re in a secure position, it’s ok to financially strategize, to create the best position for yourself.
However, I don’t think that, as long as the Republicans and Democrats and Obama are not willing to take the financial health of their country seriously, there really isn’t a good way to strategize at the moment, other than to assume that you could lose your job tomorrow and live accordingly.
I wonder of those how many just defaulted on the loan and disappeared ?
Shhhh!
When your government and those in the banking cartels are almost entirely violent sociopath kleptocrats, your money is good as gone.
The growing ex-pat communities around the globe are doing fine. Do you have your escape route planned or are you shooting for the martyr route?
It’s the new version of a home equity loan.
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