Wednesday, February 20, 2008

Scrambling Your Nest Egg

J.W. Elphinstone reports on a growing number of people taking loans and withdrawals from their retirement accounts to cover their expenses:

Trent Charlton knew the risks when he borrowed $10,000 from his 401(k) and cut his retirement savings in half.

But Charlton, a 40-year-old account executive at an Irvine, Calif., trucking company, said he had little choice because he and his wife could not keep up with monthly expenses after American Express reduced the limits on three credit cards.

As home prices fall and banks tighten lending standards, more people are doing the same thing: raiding their retirement savings just to get by and spending their nest eggs to gas up SUVs, pay mortgages or put food on the table.

But dipping into 401(k) accounts can carry risks because defaulted loans and hardship withdrawals are taxed as income and are subject to a 10 percent penalty if the worker is under 59 1/2 years old.

That means if the trend grows, many Americans will risk coming up short on retirement savings or may have to rely on an overburdened Social Security system.

"People who take out a loan or withdrawal are adding to a looming retirement crisis over the next 30 to 40 years," said Eric Levy, a partner at global consulting firm Mercer. "And what implications will that have (for) our economy?"

Some of the nation's largest retirement plan administrators, such as Great-West Retirement Services and Fidelity Investments, are seeing double-digit spikes in hardship withdrawals and increases in loan requests, a sharp departure from levels that traditionally varied little.

Administrators say consumers are using retirement savings to pay for unmanageable mortgages, maxed-out credit cards, and costly utilities and groceries.

Charlton and his wife used the retirement money and $7,000 from savings to pay down their credit card debt. They also cut monthly expenses by pawning a diamond ring and selling camera equipment he owed money on. And he's looking for someone to take over his $550 monthly payment on a gray BMW 335i he leased last April.

Charlton said his goal is to pay off the 401(k) loan in two years. He has not decided whether he will contribute to the plan during that time.

If I may be indelicate here, Trent's problem is that he thought a $550 monthly car lease payment and maxed out credit cards were appropriate expenditures for a 40-year old worker with only $20,000 in a 401(k), even before the credit crunch hit. If that's his attitude toward money, he is going to have a lifetime of financial worries.

Read the whole thing for more about the procedures for loans and withdrawals and more information on how this trend is evolving.


Anonymous said...

I can only agree.

A fool and his money...

Anonymous said...

I chatted up my local banker the other day and he said, "lots of baby boomers will be moving in with their children to survive".

The boomerang kids will have the chance to pay it back and the helicopter parents can make a lifetime career of it ;-)

Anonymous said...

I don't know which is worse; the idea that as a responsible individual I'll have to fund not only my retirement, but the Charltons' as well, or the idea that society is so politically correct that we have to preface a discussion on grossly negligent behavior with a term like "indelicate".

Lord said...

I wonder how much delight the rest of us should take in this. At least it will be someone else that will have to work in retirement.

Anonymous said...

Many are being forced to tap 401K for their kid's college tuition. Countrywide and USAA just yanked HELOCs for thousands of customers, as their home equities decline.

The only thing left was the 401K when the tuition bills came due last month.

This is why Harvard et al are elminating loans from aid packaging and upping the aid for the middle classes. They simply can't afford the product without sacrificing their future retirements.