Tuesday, February 19, 2008

Follow up to my consumerism post - "More Americans tapping into 401(k)s"

Yesterday, I wrote a blog post about the Perils of Consumerism.

The story below came out in today's paper. I'd just like to point out that the 40-year-old married man referenced in the first paragraph of the story only has $20,000 total of retirement savings.

I'd also like to point out that the Employee Benefit Research Institute determined in a 2007 study that couples need to save $300,000 for medical benefits alone if they live to a normal life expectancy (for medical expenses and medications not covered by Medicare). On top of this amount, they must save for basic living expenses for food, shelter and utilities.

Are you on-track to have saved enough by the time you retire? If not, stop spending and start saving. You may enjoy that new car now, but if you're living the last 20 years of your life on the Alpo diet, you won't much care what people thought of your snazzy ride today.


More Americans tapping into 401(k)s

Retirement nest eggs being used to make ends meet

Last updated February 19, 2008 8:25 p.m. PT


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 sport utility vehicles, 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's predicament arose as lenders are taking steps to rein in credit because more consumers are missing payments on mortgages, credit cards and loans. Borrowers are finding their credit limits suddenly reduced and low-interest cards hard to come by. Mortgage lenders also have reduced limits on home-equity lines of credit.

Meanwhile, jobs are harder to find, and consumers are getting pinched by higher food and fuel prices.

Consumers who tap their retirement accounts can take a loan from their 401(k) accounts worth up to $50,000, or 50 percent of the amount invested, whichever is less. There are no tax consequences for a loan in good standing. But if a borrower defaults, the loan is considered a withdrawal and subject to the same tax penalties.

If Charlton repays his loan and continues making contributions, his balance at 62 will be nearly the same as if he had not borrowed, according to projections by Alicia Munnell, director of The Center for Retirement Research at Boston College.

But if he repays the loan and suspends contributions for five years, his final account balance would fall by 18 percent.

Based on current savings rates, the center estimates that 43 percent of households risk not being able to fund the same standard of living during retirement as they have in their working years. That percentage increases to 49 percent for Americans between 36 and 43 whose main retirement plans are 401(k) accounts, not employer-funded pension plans like older generations.

Great-West Retirement Services, the unit of a Colorado-based insurance company that manages 3.5 million accounts for employers, said hardship withdrawals jumped 14 percent last year, and the number of loans rose almost 13 percent, with a dramatic increase occurring in the fourth quarter.

Fidelity Investments, which jockeys with Vanguard Group as the nation's largest mutual fund provider, said it saw withdrawals surge 17 percent in 2007, with record withdrawals in December, but a smaller increase in loans. Vanguard saw no change.

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