Mortgaging the Future-Minyanville

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Mortgaging the Future

Andrew Jeffery Feb 28, 2008 8:30 am


		Consumers tapping retirement savings to make ends meet.

With home equity lines tapped and credit cards maxed out, Americans are staving off financial ruin by seeking out the true lender of last resort: Themselves. The Wall Street Journal reports financial firms are seeing a startling rise in loans taken from 401(k)s and other retirement plans.

According to a report by the Center for Retirement Studies, 18% of workers dipped into their nest eggs in 2007, up from just 11% in 2006. Soaring debt is the most commonly cited reason for taking such action, with over 49% of respondents indicating they braved the high fees associated with pulling money out of their 401(k)s to pay off debt.

Aside from the obvious implications of sacrificing hard-earned retirement dollars, if borrowers changes or loses their job, they must repay the loan immediately. If that's not possible -- which is likely given the circumstances -- income tax on the withdrawal is due immediately plus a 10% penalty .

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Financial planners caution against using retirement dollars to pay off bills or debt, but this trend may not be as dangerous as conventional wisdom would suggest. We're told to hoard vast sums of money since the only respectable way to enjoy our Golden Years is tooling around a planned desert community in a BMW golf cart. Lavish trips and fine dining? The only true way to reflect on years of toil and sacrifice.

Professor Depew often discusses changing social moods. Although for many this may really be a last-ditch effort to stave off foreclosure or bankruptcy, the subject's worth evaluating from another angle. People are more apt to change when nudged -- or shoved -- in the direction of new spending habits. Envisioning a more modest retirement may be a welcome departure from the culture of more is more.

There are many options when mulling how to spend one's retirement; not all require following the herd to Scottsdale or Palm Springs. Consider the option of renting a villa on the beach in Mexico for $500 a week. It would take 20 years to spend the $500,000 or so it takes to buy a decent spot on an American coastline... And the tacos are incomparably better.


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Comments (5)

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John Elliott

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02-28-2008, 10:07 am
At least if you're vested and your company matches. Here's my logic - If you put money into retirement first you get a great guaranteed return - often 100% immediately (the match). So your $1 becomes $1.50 or $2 Read More

Robert Underhill

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02-28-2008, 10:18 am
It is not good news if people are borrowing against their 401K's. I'm not surprised it is happening but it is not good news nonetheless. You make a good point about how much one does need for retirement however. Most of t Read More

Andrew Jeffery

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02-28-2008, 1:10 pm
John, I think your logic is right - certainly an argument for maxing out 401 contributions. Andrew Read More

Andrew Jeffery

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02-28-2008, 1:11 pm
Robert, Agreed that what this trend means about the state of our economy is pretty scary. That people are making the hard decision to pilfer their retirement to make ends means does not mean the consumer is in very good shape. Read More

Ron Price

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02-28-2008, 3:37 pm
I think the government should immediately suspend the early withdrawal penalty. One: it can increase tax revenues now that it would otherwise have to wait to collect in the future. Two: It will stimulate the economy because vast reserves of funds wil Read More


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