Bad Trend Alert: More People Tapping Their 401(k) for Cash

Here's a sign of the retirement times that things are headed the wrong way: more people are tapping their 401(k) for cash. The details from MSNBC:

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.

Yikes!

I know some people will comment that "tapping your 401k to pay off a credit card debt is a good move." Maybe. On paper. A better move is to control your spending and pay off your credit card debt out of your surplus income. And what about cashing out your 401k for groceries and utilities? This seems to indicate that these people are simply living too close to the edge financially.

Anyway, borrowing from your 401k is mistake #4 of the five 401k mistakes to avoid. 'Nuff said.

For more on retirement, see these posts:

• Six Non-Financial Steps for a Great Retirement

• How to Retire Rich

• Plan on Spending 35% of Your Retirement Income on Healthcare

Comments

[Edmund]

I don't think tapping your 401k for paying off credit card debt is a good idea. It is similar to tapping your house to pay for your credit card debts.

Credit card debts are unsecured loans. If you tap your house you are using a secured loan to pay off an unsecured loan.

401k is very protected. It is difficult for anyone, including your creditors, to get that money. The only way for them to get to your 401k money is if you take it out yourself!

[moneyandpf]

I'm sure almost everyone who reads this post agrees 100% that you should not cash in your 401k early. The problem is the people who make these mistakes aren't reading financial blogs. More of an effort needs to be done to make people aware of personal finance including local news, radio, newspapers, etc.

If you need extra cash, it's much better to stop contributions for awhile than to take a withdrawal.

[Mike S]

Scary stuff. This probably means higher taxes for me in the future. Somebody is going to have to take care of these IDIOTS in the future since they will not be able to take care of themselves.

Thanks, I needed to get that out. I feel better now.

[Kevin]

Amen, Mike S. I'm nervous to see what happens when all these people eventually have to pay the piper. Either our taxes are going up, or there will be a lot of people struggling to get by with no retirement income other than Social Security.

[db]

Horrible idea. Been there. Done that.

Back in the 90s, when I was really cash-desperate (underemployed, working full-time and going to grad school full-time), I borrowed from my 401(k) to pay credit cards.

What happened?
a) I struggled month-to-month even more because I was paying back the loan paycheck to paycheck, even while dropping my regular contribution to 0 (so hence wasn't continuing to save in my 20s).

b) I charged the credit cards back up anyway.

c) Before the loans were paid back, I got laid off. Instant default.

I will never make that mistake again.

[Steve]

This may be handwriting on the wall for a bigger issue. If the government is considering bailing out the subprime mortgage market because people didn't/couldn't plan their finances for mortgages (it turns out) they can not afford, what will happen when all of the baby-boomers (and those who follow) retire, but did not plan well for retirement? Is the government going to bail them out too? Big Fed is trying to protect our economy from the ripple caused by the mortgage collapse, what will they try to do for the bigger wave of retiremenet unsustainables? Deflated 401k's may not be a personal problem for those who have misused it, it may become a taxpayer issue for all of us...

[Ryan]

Steve,

That is a good point and something we have to think about. I'm getting very annoyed by continuing to be responsible in this society while others get bailed out for thier irresponsibility at my expense.

[Ryan]

Steve,

That is a good point and something we have to think about. I'm getting very annoyed by continuing to be responsible in this society while others get bailed out for thier irresponsibility at my expense.

[Andrew]

It's clear that this is yet another case of people living above their means. Here we have a purported "account executive" who at 40 has managed to save a paltry 20,000 for retirement, yet is driving around a leased BMW and living in what looks to be a pretty spacious and well appointed house - judging by the kitchen.

Forgive me for venting but I'm 42, am not employed at an executive level but have managed a 170,000 401k balance in less than 8 years, mostly by living in a very modest house and driving a modest used car the entire time, which enabled me to save at least 10% of my income. Housing costs here in Portland, OR can be a challenge as well, but I've recently moved up from my first modest ranch into a nicer 2 level home closer to town. It took me 8 years to get there but I was able to do it by having plenty of equity and never taking out a second mortgage or HELOC for large purchases or unsecured debt payoffs.

There's the easy way and the right way. If people want to be grasshoppers instead of ants that's their perogative, just don't expect me to jump up and support bailout programs or be gracious if they come looking for a handout when times get tough. This is not rocket science people. Credit is like a gun or a car, a great tool when used with caution and discipline and foresight, but a terrible danger to yourself and others if used irresponsibly.