There’s new data out that further shows just what a train wreck 401(k) plans are. Put plainly, do-it-yourself retirement just isn’t working for most folks.
The Washington Post this week writes about a new report that shows more than 25% of workers with retirement savings accounts like the 401(k) take money out while they’re still working to pay for living expenses.
The group most likely to tap their accounts? Workers in their 40s, according to a report from financial advisory firm HelloWallet cited in the Post story.
There are a number of reasons why raiding retirement savings is a bad idea. Here’s the No. 1 reason:
“Experts warn that when workers draw on their retirement accounts to pay current bills, they put themselves at greater risk of descending into poverty upon retirement, which would leave them dependent on government programs such as subsidized housing or food stamps. Nearly 6 million senior citizens were living in or near poverty in 2010, according to a Senate committee, a number expected to increase sharply over the coming decade after a long period of decline.”
Of course, the households most likely to withdraw or borrow from retirement savings are the ones least able to afford it.
The HelloWallet report found that 30% of households earning less than $50,000 annually had taken cash from a retirement plan early; just 12% of households earning between $100,000 and $150,000 cashed out early.
Even if taking money out early doesn’t send you into poverty, it’s still not a good idea.
If you borrow from your 401(k), you have to pay it back. And you usually have to do it within five years.
If you can’t pay it back or if you make a hardship withdrawal before you’re 59 ½, you’ll be charged a 10% early withdrawal penalty.
More importantly, the money you take out is no longer working for you, helping to ensure you have a comfortable retirement.
And yet, it’s hard to blame people for raiding their 401(k) accounts when money is tight. You may not have another option. And the economy hasn’t exactly treated many of us kindly over the last few years.
That’s why I’m curious to know, if you’ve taken money from your retirement account, for what purpose did you do so?
Take our poll below.
- To pay credit card debt/bills
- To make a down payment on a home
- To finance college/education
- To purchase a vehicle
- To use the money now while I am healthy1
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