More People Raiding Their 401(k)s

CBS News (See BS) ^ | July 16, 2008

[Freedom_Is_Not_Free]

Study Finds An Increasing Number Of Americans Are Using Retirement Funds For Emergencies

Americans are raiding their already fragile retirement piggy banks to weather financial hardships such as unemployment, medical emergencies and buying a home.

And they're doing it even though borrowing a modest $5,000 can dramatically erode savings over time, according to a study released Wednesday by the Center for American Progress.

The study found workers in 2004 had $31 billion in outstanding 401(k) loans, a fivefold increase from $6 billion in 1989. Between 1998 and 2004, an average of 12 percent of families with 401(k) plans borrowed from them.

"They don't necessarily pay penalties. But the penalty is that they have fewer retirement savings," said Christian Weller, an author of the study.

As economic conditions grow bleaker, the number of people dipping into retirement money will only rise, he added.

A $5,000 loan, for example, could cut retirement savings by 22 percent even if the loan is repaid without penalty, according to the study. That's assuming the person has a $40,000 salary and is five years into a 35-year career.

One reason people are increasingly using 401(k) plans as a crutch is because they're so easy to access compared to pensions and individual retirement accounts, or IRAs.

"The borrower acts like a bank to himself," Weller said.

Typically, borrowers can repay loans within five years without penalty. Loans for first-time homes must be repaid within 15 years to avoid penalties.

That doesn't mean people are raiding savings to go on shopping sprees. Middle-class families in particular are turning to retirement money to get through financial crises such as unemployment and medical emergencies, the study found.

When Rachel Hernandez took out a $7,000 loan from her retirement plan, for example, it was after her daughter was killed and she took time off to care for her grandchildren.

"I understood it was going to hurt my retirement, but it was something I had to do," said Hernandez, a 46-year-old resident of San Antonio, Texas. She was working as a reservation agent for Southwest Airlines at the time and it was the second time she borrowed from her 401(k); the first time was to buy a house.

"Obviously it's going to impact my retirement, but I'm glad I had the option," she said.

People can typically borrow $50,000 or half the vested balance of their 401(k) accounts with extremely favorable interest rates. Failing to repay loans on time typically incurs a 10 percent excise tax and borrowers must also pay income tax.

Dipping into retirement money wouldn't be a problem if other sources of retirement income - such as Social Security and pensions

weren't drying up, Weller said. More people today are counting on 401(k) accounts to be their primary income source in retirement.

Yet a study by Hewitt Associates this month found four out five workers aren't socking away enough money into their 401(k) accounts to keep up their standard of living after retirement.

On average, employees are projected to replace just 85 percent of their income in retirement, compared with the 126 percent they would need when factoring in inflation, longer life spans and medical costs, the study by Hewitt found.

[Freedom_Is_Not_Free]

Nope, nothing recessionary here... People are suffering at every level and are in debt up to their eyeballs. The portion of people that prepare for a rainy day is just miniscule. Debt, debt, debt!!! It's a killer. Raiding your 401(k) is a sure recipe for disaster later on. Many of these people who think they are hurting now are going to be really hurting come retirement. No wonder so many people expect to work into their seventies -- they will still be saving toward their retirement in their sixties. Debt is a killer.

[autumnraine]

I had stated before that the economy isn’t showing the signs of recession yet because people haven’t run out of their savings. I think in a few months we’ll start to see the effects of it and once people stop spending, the rest is downhill. Not doom and gloom, but just starting to strap in for bumpy ride.

[Eric Blair 2084]

401k loans are not that horrible. You are paying back the interest to yourself.

You don’t want to make a habit of it, but there are worse ways to borrow money.

[Orange1998]

I propose letting people tap their 401K to payoff mortgage debt without penalty. It will reduce foreclosures.

[cripplecreek]

I’m kinda glad my mother raided hers and bought a house. The house is paid off so taxes and bills are the only expense.

[aMorePerfectUnion]

“More People Raiding Their 401(k)s”

A bad, bad move.

[Freedom_Is_Not_Free]

You are assuming these people will have the means to pay back their 401(k) loans. Failing that, they will have to pay tax and penalty. Many of these people are cash strapped such as unemployed for a while, and if they don’t get re-employed soon, they will reneg on the loans and be assessed taxes and penalties. Same for many who are just deep in debt and don’t have cash for emergencies. A big bump in cash to pay back the 401(k) likely is not forthcoming.

[blondee123]

INTERESTING DATA JUST RECEIVED ON TAXES

Spread the word.....
 This is something you should be

aware of so you don't get blind-sided.
 This is really going to catch a lot

of families off guard. It should
 make you worry.

 Proposed changes in taxes after 2008 General election:


 CAPITAL GAINS TAX

 MCCAIN
 0% on home sales up to $500,000

per home (couples) McCain does not
 propose any change in existing

home sales income tax.

 OBAMA
 28% on profit from ALL home sales

 How does this affect you?

If you sell your home and make a profit, you
 will pay 28% of your gain on taxes.

If you are heading toward retirement
 and would like to down-size your

home or move into a retirement
 community, 28% of the money you

make from your home will go to taxes. This
 proposal will adversely affect the

elderly who are counting on the income
 from their homes as part of their retirement income.

 DIVIDEND TAX

 MCCAIN 15% (no change)

 OBAMA 39.6%

 How will this affect you?

If you have any money invested in stock
 market, IRA, mutual funds,

college funds, life insurance, retirement
 accounts, or anything that pays

or reinvests dividends, you will now
 be paying nearly 40% of the money

earned on taxes if Obama become president.

The experts predict that 'higher

tax rates on dividends and capital gains

would crash the stock market yet
 do absolutely nothing to cut the deficit.

 INCOME TAX

 MCCAIN (no changes)

 Single making 30K - tax $4,500
 Single making 50K - tax $12,500
 Single making 75K - tax $18,750
 Married making 60K- tax $9,000
 Married making 75K - tax $18,750
 Married making 125K - tax $31,250

 OBAMA
 (reversion to pre-Bush tax cuts)
 Single making 30K - tax $8,400
 Single making 50K - tax $14,000
 Single making 75K - tax $23,250
 Married making 60K - tax $16,800
 Married making 75K - tax $21,000
 Married making 125K - tax $38,750


 Under Obama your taxes will

more than double!
 How does this affect you? No explanation

needed. This is pretty
 straight forward.

 INHERITANCE TAX

 MCCAIN 0% (No change, Bush repealed this tax)

 OBAMA Restore the inheritance tax

 How does this affect you? Many families

have lost businesses,
 farms and ranches, and homes

that have

been in their families
 for generations because they could not

afford the inheritance tax.
 Those willing their assets to loved

ones will not only lose them to
 these taxes.

 NEW TAXES BEING PROPOSED BY OBAMA

 * New government taxes proposed on

homes that are more than
 2400 square feet

 * New gasoline taxes (as if

gas weren't high enough already)

 * New taxes on natural resources

consumption (heating
 gas, water, electricity)

 * New taxes on retirement accounts

and last but not least....

 * New taxes to pay for socialized medicine

so we can receive the same
 level of medical care as other

third-world countries!!!

 

 

[sweetiepiezer]

bttt

[LetsRok]

Also, If you borrow from your 401K and then leave your job, the entire amount becomes due IMMEDIATELY.

[mylife]

I heard that 401k’s are now offering debit cards!

[mdittmar]

It’s my money I earned it,I’m making alot better than the 2% return on the money the government takes from me for “Social Security”,and if I want to take a little out and pay myself back at a lower interest rate than I could find anywhere else,that’s my business.

[dawn53]

We’ve never raided ours, but when stock markets fall and people see their 401K savings being eroded, I could imagine they might say to themselves, “Why not use the money now since it looks like we’re going to lose a good bit of it in the downturn if we don’t withdraw it.” (yeah I know you don’t ever really lose if you don’t sell, but it can take years to recover lost funds in the market.)

We’ve been moving ours around to safer funds within the plan, since the stock market’s been so volatile. But the average Joe gets his quarterly report and see’s it diminishing and I can understand the temptation to use some of it now.

[sweetiepiezer]

Was wondering where you found these facts.

[mrmargaritaville]

my wife and I are “raiding” ours to pay for our daughter’s educations.
I will have paid the last three years of my oldest daughthers college tuition with 401K money. Having borrowed the money (and currently repaying) for her FR year.
I will borrow the first two years of my youngest daughter’s tuition and then hit my 401K for her last two years. At that time I will start to repay the loans from the first two years.
I considered the interest rates on student loans and what my 401K was earning, and figured it was just better to bite the bullet now rather than pay the high interest charges on student loans. I still have to pay the tax on the money I withdraw, but not the penalty because it’s being used for tuition (not room and board).
I did not want to saddle my daughters with the debt of the loans so my wife and I have taken on that burden. And both my wife and I are currently contributing to our 401Ks.
I know it may sound nuts but I’ve looked at it a couple of different ways and at the age of 50 I figure to work another 17-20 years. I guess we’ll see....

[PGalt]

Raided mine, BIG TIME.

[Eric Blair 2084]

You are correct. That loan counts as taxable income if they are laid off, take a distribution and don’t pay it back.

It is what it is.

What can Gubmint do about it?

Maybe add another chapter to the tax code to help them, I dunno.

[Freedom_Is_Not_Free]

Yup! Now its just as easy to gut your retirement account as it was to gut your home equity. See where all this is going?

http://a.abcnews.com/GMA/Story?id=4373588&page=1

1. How does the 401(k) debit card work?

There is a financial services firm in New York that is now marketing a debit card called Reserveplus, which allows employees an easy way to tap into their 401(k) retirement savings.

The card is essentially a debit card that allows you access to money from an approved 401(k) loan. Like with any 401(k) loan, an employee applies for the loan with his employer.

If the loan is approved, rather than having the loan amount deposited into your checking account, it is deposited into an account and can be accessed through a debit card.

2. Is this a good way for people to cover their expenses when they are a little short or is this a bad idea?

It is a really bad idea. The notion that you can access your 401(k) savings through a debit card is really troubling. I am a huge fan of debit cards as an alternative to credit cards.

[meyer]

I propose letting people tap their 401K to payoff mortgage debt without penalty. It will reduce foreclosures.

On the one hand, I'd pay off my mortgage tomorrow. On the other hand, the stock market would crash because many would do the same.

[mylife]

Frightening

[Freedom_Is_Not_Free]

You are smart to move your money to safety. I think it is still a matter of “better late than never”. I’m so glad I went all cash in 2006 and have been enjoying the 3+% return over the 20% haircut. A lot of people probably think it is too late to go to safety now, and they may well be right, but according to stats, most bear markets stop 10%-12% below where we are now on the indexes. It’s not too late to get out now, IMHO.

[Freedom_Is_Not_Free]

Not that any of us here are stupid enough to vote for Obama, but the bigger challenge will be getting Conservatives to support McCain and not waste their vote on a 3rd party candidate and let Obama in the back door. I pray that Nader will run yet again.

Keep posting your tax post. If that can move some of the base to vote for McCain to block an Obama win, then I say, you go, go, go!!!! Keep posting! We CANNOT afford Obama.

[Extremely Extreme Extremist]

A bad, bad move.

How so? If Obama is elected, I'm doing the same thing.

[Freedom_Is_Not_Free]

Your loan is targeted and done with reason. It is still a slight gamble, but is likely to save you money in the long run. Quite different from these others in the article. They may never be able to pay back their loans and will be assessed taxes and penalties. It is no fun to take out $40,000 and only get to keep $25,000. Most people don’t think of that.

Of course, repay the loan and all you have lost is potential appreciation on the balance borrowed.

It sounds like you have no doubt you can service your loan. Being honest does make you a sucker in this nation, though... Many people would load the kids to the eyeballs with student loans and then give them a place to stay & some allowance while they default on those student loans. Financially, you are way ahead doing that. A few years later, their loan balances are gone, debts forgiven, and they are laughing at people like you doing it in a way that you can live with your conscience.

Nice guys do finish last — in this realm.

[Freedom_Is_Not_Free]

No fun. Just be sure to pay it back or you will get killed on penalties and taxes. Often you don’t have a choice, but that kind of reaming leaves a mark for a long time.

[Freedom_Is_Not_Free]

Not half as frightening as when you consider the context. If some people were deep in debt and hurting and raiding retirement savings, that would be awful for them.

But consider plunging house values, rising unemployment, a collapsing dollar, skyrocketing food and oil, banks are bankrupt skeletons hanging by a thread, all the Alt-A and Option Arm foreclosures are yet to be added to bloated housing inventory, business is slowing down, and banks and businesses are going under.

You are frightened? I’m terrified. No, I don’t expect Great Depression II, the Sequel, but lord almighty, things are going to get very very rough for a hell of a lot of us. Very rough. Belt tightening, and some people on the edge of financial abyss.

The idiot LibDemCommies always said we are just one paycheck away from homelessness. Well, they were full of snow and it was not true at all. But the coming financial crisis is going to have some segment of the working poor literally one paycheck away from homelessness. Literally. Before this crisis has run its course, we may see homeless camps of sane, reasonably educated lower-middle class unemployed families camping out somewhere living on meager government welfare checks. Not the crazy, drug addicted wacko’s, but real poor people. I doubt it, as I expect government to pump them with rent money so as not to become homeless, but it is not inconceivable they could end up homeless as well.

I tell you, I am terrified of this crisis. I can’t see what is coming but it is dark on the horizon. Really dark.

[Freedom_Is_Not_Free]

Without a doubt, it is your money and you can gut the entire thing if desired. That’s not the point. The point is, many of these people will be begging for welfare because they will have no pension and no retirement savings. Are you in that category? If not, I could care less if you gut your 401(k) or not. If you are, I don’t want to pay for your retirement so you could play now. That is the point.

[kcvl]

according to a study released Wednesday by the Center for American Progress.

Founded in 2003, CAP (Center for American Progress) is headed by John D. Podesta, former chief of staff to President Bill Clinton

Oh, yeah, like I'm going to believe that pig. And better yet, CBS repeats it like it's fact, as usual.

[Freedom_Is_Not_Free]

I hope you realize we are not talking about retirees withdrawing 401(k) investment funds, but about pre-retirees only borrowing against their investment with intent to pay it back. You lost me how that pertains to Obama’s pending election.

[mylife]

But consider plunging house values, rising unemployment, a collapsing dollar, skyrocketing food and oil, banks are bankrupt skeletons hanging by a thread, all the Alt-A and Option Arm foreclosures are yet to be added to bloated housing inventory, business is slowing down, and banks and businesses are going under.

That is just what I was thinking about.

Consider investing in fire arms and ammo ;)

[mdittmar]

I went all in,guess we will see who is correct.

[mdittmar]

Did you ever have a government job?

[Freedom_Is_Not_Free]

You can lie to yourself but it doesn’t do any good.

Just for you, here is a link to a similar item on the Wall Street Journal or is the WSJ too liberal for you, so you think they are lying too.

Denial just delays your acceptance of the truth, it doesn’t negate that truth.

http://articles.moneycentral.msn.com/RetirementandWills/InvestForRetirement/WorkersStepUpRaidsOn401ks.aspx

Workers step up raids on 401(k)s

More Americans are tapping their retirement plans as the credit crunch and falling home values make cash harder to come by. But such a loan is usually a bad idea.
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Article Tools

By The Wall Street Journal

Financially stretched workers are increasingly breaking into their retirement accounts to get cash.

Over the past couple of decades, the 401(k) account and its brethren have become the main retirement savings vehicles for millions of Americans. But as the credit crunch and declining home values limit many types of consumer loans, a growing number of workers are tapping into these accounts as if they were piggy banks.

Eighteen percent of workers had loans outstanding from their retirement plans in 2007, up from 11% in 2006, according to a survey by the Transamerica Center for Retirement Studies, a nonprofit corporation funded by Transamerica Life Insurance.

Major retirement plan providers are reporting a similar trend. The number of participants taking loans from their 401(k) plans rose by 7% at the end of last year from six months earlier, according to a JPMorgan Chase analysis of 350 plans nationwide that cover 1.3 million people. Those results followed a period from January 2005 through June 2007 when loans from these 401(k) plans fell by 15%.

[kcvl]

Christian Weller, an author of the study

Weller has also worked at the Center for European Integration Studies at the University of Bonn in Germany, under the Department of Public Policy of the AFL-CIO in Washington, D.C.

Christian Weller, chief economist at the liberal Center for American Progress (started by John Podesta of Clinton years), argues that the typical middle-class family is not doing better today than it was 25 years ago, “according to new measures of economic well-being developed in this report.” But Weller’s new measures are based on an “average two earner couple that had an income of $49,596 in 2005.” This is odd because the official U.S. Census median income of two-earner couples in 2005 was $82,600—a full $33,000 higher than Weller’s couple (which is also meant to be a median figure).

More here...

[Freedom_Is_Not_Free]

Everybody has their own approach to financial risk. No risk no rewards. Obviously, my predictions are opposite yours. Your risk may well be rewarded. Stay safe.

If you just went “all in” then you were “all out” so you saved yourself a 20% haircut.

[dawn53]

With our plans, you can’t really move the money out, but you can move it to stable funds. We were pretty diversified within the plan (actually plans, we have a couple from previous jobs) and were doing good as far as returns. But when things turned south, we moved into the most “stable” fund available. Just got our quarterly and figured if we had left the money where it was, we would have lost around 10 percent, instead we made about 2 percent (LOL, better than losing, I guess.)

Between the money woes, oil problems, and the upcoming election, the situation is such that I think we’ll keep it in the least risky plan for the time being.

[Choose Ye This Day]

Problem #1:

You’re paying back pre-tax money that you borrowed with AFTER-tax dollars. Then, when you get to retirement, guess what? You get taxed on it again!

Problem #2:

You’re sitting on the sidelines. If the stock market makes a big upswing, you miss out.

Problem #3:

If you leave the company before the loan is entirely paid back, the balance is then due out-of-pocket, or you have to pay taxes and penalties on it as a distribution.

[Freedom_Is_Not_Free]

I have a government job. I am a Bridge Engineer with Caltrans, the California DOT. I’m one of those dreaded state workers mooching off the system for 1/3 less than private pay and no bonuses and no 401(k) matching funds. OK, I have great job security and will get a good pension. Just people here hate government employees, so I’m sure some here won’t like me for that alone.

As if my character and work ethic would suddenly soar just because I was privately employed. To answer your question, “I’m from the government and I’m here to help...”

[Eric Blair 2084]

Yes, I know these things. I just can’t comment completely.

I would lose my license as a pimp and a drug dealer.

[Choose Ye This Day]

I’m fully invested and have every intention of staying that way.

I haven’t lost a dime, and don’t intend to.

I’m enjoying the big bargains.

[Freedom_Is_Not_Free]

What is your point? Why don’t you do your own research.

I’ll make you a deal... Come back here and PROVE to me that people are raiding their 401(k) accounts less than before, and I’ll send you $100, no strings attached.

Of course, if you can’t prove it, then you send me $10, no strings attached.

Deal? Feeling confident? You can shut me up really easy, just prove the article wrong and get a free $10.

[Freedom_Is_Not_Free]

I knew what you meant. When I said “out”, I meant out of equities, not out of your retirement plan.

[kcvl]

I don’t really care if they are raiding their 401(k). My point is the CBS article repeated crap from a John Podesta organization and didn’t mention that.

I don’t need to prove anything to you or anyone else. Make up your own mind if it’s anyone’s business what one does with their 401(k).

[Freedom_Is_Not_Free]

Good luck. Who is to say. I don’t have a crystal ball.

[mdittmar]

I’m am sure you work hard every day,as we all do.

[mrmargaritaville]

I’m not “borrowing” from myself, I’ve taken early withdrawls-from a 401K from an account from a former job. I worked for a chemical division of a “big oil”-Amoco for 10 years and was able to sock a little money away from ‘85 to ‘95. I know it was not a wise thing to do, but I put the overwhelming majority of my money in an Amoco Stock Fund-hey, oil’s a finite resource and the way demand was growing I figured their stock would continue to go up even in down markets. So far I’ve been lucky (I won’t say good-I’m not that smart).
But like I said I’m still contributing to a 401K and so is my wife. And the deal with burying my kids under the weight of student loans-my parents paid for my education, I figured the least I could do was the same for my kids. Once they graduate things will be tough enough as it is with rent\(or)mortgage, food,car etc that they didn’t need that HUGE cloud hanging over their head. What they do after graduation is on them, but I want them to at least start out so they’re not in a hole.
I find it interesting that Michele Obama whines about repaying loans, and she’s pulling down close to 500K. It’s not like she can’t afford it. (oops did I say whines-my apologies to Phil Gramm).

[mdittmar]

P.S. My Dad was a Letter Carrier for 30 years.

[tbw2]

But if you take out a 401K loan and then get laid off, you are in doubly hot water (having to pay it back and not having the income to do so).

[WVKayaker]

...I’m one of those dreaded state workers mooching off the system for 1/3 less than private pay and no bonuses and no 401(k) matching funds...

...doing exactly what you desire. It's easy to just "show up".

I am a guy on the other side. I am a business owner (actually several), and have no "retirement plan", outside what I have provided for myself. I bought some stock back around the turn of the century, first time in my life, when I was a young and foolish 53. I am now 61. I had previously kept my money in dirt. I develop and sell land. Most of all, I am a salesman, and a dreamer.

I first bought Xerox, when it traded around $4. I had seen it trading around $80, and said..."hmmmmm". I bought and sold it three times in 10 months, and turned $1000 into almost $7k. I took those dollars and bought aapl. I have owned Macs since they were new. With OSX, IntelMacs, iPhones, iPods, iEverything, I watched my nest apple grow. with splits, and after another round of buy/sell, I had a little over a million bucks. I sold it and bought some more land. I paid the taxes. I bought some k-rands, and have a few "coffee cans" buried... along with a lifetime supply of other necessary items. I am single again, with just my dog, Spot. I have many friends.

I own property in several states, and a motor home for transit. I have 2 steers fattening in a friends fields, and set up a tenant farmer to supply my veggies. I got some city hippies that camp out here, and keep the gardens green, and they even pay me for the privilege. It just takes a little more risk, to gain a little better reward.

Quit yer' bitchin'! It's your bed, so lie in it. You sound bitter... or envious!

BTW, I went bankrupt in 1988. But, my net worth now far exceeds what I can spend... and my children are already receiving their inheritances. I repaid all those I owed.

Your mileage may vary!

[Freedom_Is_Not_Free]

LOL. Phil will never forgive you. Nor I him, for Glass-Steagall.