Many using 401(k)s as a safety net

[SoCalDem]

http://www.boston.com/business/personalfinance/articles/2010/08/21/many_using_401ks_as_a_safety_net/

Tapped-out workers tapping retirement funds, Fidelity says
By Erin Ailworth
Globe Staff / August 21, 2010

American workers, many in their prime earning years, are raiding their retirement savings in record numbers to either stave off eviction or foreclosure, pay for college, or buy a home. The number of people who took early withdrawals from their retirement accounts jumped 38 percent in the three months ending in June, according to Fidelity Investments of Boston, one of the world’s largest retirement plan administrators. During the second quarter of this year, 62,000 plan participants took out so-called hardship withdrawals, up from 45,000 in the previous quarter. To make a hardship withdrawal, people must demonstrate an immediate and heavy financial need.

Even more telling, the number of people taking loans from their 401(k) is at a 10-year high, according to the investment firm. Of the 11 million people with retirement funds analyzed by Fidelity, 22 percent had loans outstanding. “The economy is really forcing people to perhaps look to other sources to help supplement their reduced household income or the fact that they have less take-home pay,’’ said Beth McHugh, vice president of market insights at Fidelity. “The challenge is that folks may not be thinking about the long-term implications of doing so.’’

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“If the economy is starting to bite into retirement savings, you are setting yourself up down the road,’’ Truscott said. “I think the fact that people will come in, reduce their retirement savings, and pay a penalty suggests that there are some people out there who are getting pretty desperate.’’ Fidelity, which analyzed 17,000 retirement plans representing 11 million participants, also noted that the people dipping into their retirement savings are, on average, between 35 and 55 years old — in other words, workers in their peak earning years, who should be socking money away.


The average 401(k) account at the end of the second quarter was at $61,800. That’s up 15 percent from the same time last year, according to Fidelity. The average initial loan from an account was $8,650, and the average loan duration was three and a half years.

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[OutNow]

1. Warning - if you lose your job a 401K loan

must be paid back in full immediately, or you are hit with a penalty. If your job situation is already shaky, a 401K loan might not be a good idea.

OTOH, who can worry about retirement when the bank is ready to take your house?

[peanut]

2. I did that!

and my mother would smack me... I was one who regarded that 401K as sacrosanct, do not touch... that was until my partner and I sold our house, moved upstate, started a business/restaurant. Since then, I've been "raiding" my 401K for the last few years for a few thousand here and there, just to keep the wolves at bay. Hey, what's not mentioned in the article, is that taking a little from the 401K, even with the penalty, is better than high interest credit card debt. Or (as I experienced this summer) contracting shingles at an early age from unrelenting financial stress..

[ThomWV]

3. If you've got a 25% credit card and a 401k paying -3% who cares about a 10% penalty?

[NNN0LHI]

4. Safety net used to be a union contract

Worked pretty well for decades too.

Don

[SoCalDem]

5. that, and savings accounts that people used to have

Younger folks have never known a time where your take-home was enough to live on, and there was money left over for savings..

Christmas Club accounts were the prehistoric "credit cards" back then. I used to work at a bank, and every January was "start-up" month & there was always a contest for tellers & new accounts people to see who could start up the most accounts.

People spent what they had saved, when they got that check in November & all the local stores knew when those checks were going out..:evilgrin:

[Yo_Mama]

6. Housing tax credit is responsible for the big uptick in Q2

The same showed up in large time deposits at banks. Take a look at H.8 (scroll down to large time deposits)
http://www.federalreserve.gov/releases/h8/current/default.htm

A house is a capital savings account of another type, and the interest you pay on the mortgage is more than the returns a lot of people were getting. Plus, say you took out 40K from an IRA/401K type account. The 8K housing credit more than covers the 10% charge (and a lot of people didn't have to pay all of it because you get an exemption on downpayments for first-time purchases).

The extra downpayment will lower the monthly payment and might lower the interest rate charged on the entire loan or knock out mortgage insurance requirements.

This isn't necessarily stupid. One thing you can bet on - a person who has substantial retirement funds generally is not totally ignorant about money.

[SoCalDem]

7. "...The average 401(k) account at the end of the second quarter was at $61,800..."

That's not very "substantial".:( an the next sentence said that that figure was UP 15% from previous years..:(

[Yo_Mama]

8. Sadly, it is substantial

And that's only the average.

The 15% probably represents some of the asset recovery in prices. Only a small subsegment of the population buys homes, but they are on average younger and have less savings.