Depleting 401K

[SlowTwitcher]

Wondering if taking money out of 401k early is always a bad idea? Let's say an engineer with GM loses his job on Jan 1 when the company folds. Biggest problem is paying mortgage monthly with no job or Mcdonalds/Walmart job making $20grand a year. If the choice were foreclosure or withdraw $100,000 to payoff mortgage, I would likely choose the latter. Plus, even with the 10% penalty, taxes would still be manageable with the current low income level.

 

[FurBall]

Among family members who are in their sixties and seventies, the only one who is still working (and claiming to like it) is also the only one who can't afford to retire.

My mother finally retired for good last year at 83. By then she could no longer drive due to macular degeneration and although undiagnosed at that time she also was suffering from dementia. She definitely could afford to retire but just would not.

Of course, this is the depression generation and although she has virtually no short term memory, she can remember $ every time. She can't remember where she went to lunch after church, who else was there, who drove her home, what she ate.., but she can tell me she spent $4.19.

 

[aaronc879]

I'm 29 and although i'm in better financial shape than the majority of 20-somethings I know, I am still probably just a pink slip away from dipping into my 401k/rollover IRA or most likely Roth IRA. As long as I have my job i'm fine but i'm a highschool graduate working in manufacturing in an area that has lost a large % of it's manufacturing jobs already. I have no experience in anything other than manufacturing. If I lost my job, I could be unemployeed or underemployed for a very long time and would have no choice but to raid my retirement accounts. At least I have retirement accounts. A lot of people older than me with higher paying jobs have far less saved than I do.

 

[Texarkandy]

I'm 29 and although i'm in better financial shape than the majority of 20-somethings I know, I am still probably just a pink slip away from dipping into my 401k/rollover IRA or most likely Roth IRA. As long as I have my job i'm fine but i'm a highschool graduate working in manufacturing in an area that has lost a large % of it's manufacturing jobs already. I have no experience in anything other than manufacturing. If I lost my job, I could be unemployeed or underemployed for a very long time and would have no choice but to raid my retirement accounts. At least I have retirement accounts. A lot of people older than me with higher paying jobs have far less saved than I do.

I might suggest before continued funding of your 401k - you fund an "emergency fund" in a money market or something else liquid - so if you get the pink slip you won't have to raid the 401k.

Figure out how much you might need - 3 months, 6 months, a year? - then save it up (don't forget to factor in how much unemployment monies you'll get & for how long if you get laid off) - in the meantime put no more in your 401k than you have to to get your employer's matching.

If getting laid off is a real possibility you may want to do what you can to also get rid of any debt you're carrying (if any)

 

[boont]

A Friend In Need

"We have a friend who has wiped out his 401k because he is too lazy to work"

I'm glad you're not my "friend".

b.

 

[lucija]

Read a recent article about an increasing number of Americans depleting their 401k's just to pay bills due to layoffs and housing crisis. How many of you know of such instances? Is this common in your area? ....

I personally do not know anyone (young or old) who dipped into their 401(k). Perhaps they have, but they do not want to advertise this fact. However, I know of many people who are (and have never) contributed to their 401k plans (or any other long term savings). I also know lots of people who are not eligible for any type of pension and contribute less than 5% of their salary. They keep telling me, they will start/ramp-up their saving "later on"... they have been telling me this for years.

 

[Gardnr]

"We have a friend who has wiped out his 401k because he is too lazy to work"

I'm glad you're not my "friend".

b.

You've got to be kidding, right? Why should anybody give him money when he's been irresponsible and lazy too? That only enables bad behavior on his part and would hurt the person giving money with no good outcome at all. Do you enjoy throwing money down a rat hole?

 

[FinanceDude]

I'm 29 and although i'm in better financial shape than the majority of 20-somethings I know, I am still probably just a pink slip away from dipping into my 401k/rollover IRA or most likely Roth IRA. As long as I have my job i'm fine but i'm a highschool graduate working in manufacturing in an area that has lost a large % of it's manufacturing jobs already. I have no experience in anything other than manufacturing. If I lost my job, I could be unemployeed or underemployed for a very long time and would have no choice but to raid my retirement accounts. At least I have retirement accounts. A lot of people older than me with higher paying jobs have far less saved than I do.

Why not go to night school or something and get certified in computers or something? It would be cheap,would not interfere with your life, and you would have a contingency plan?

 

[JohnDoe]

Before I retired, I ran an organization with about 30 employees, most of whom were younger than I. I was amazed at how little these folks were putting away for retirement -- most didn't participate in the 401(k) plan offered to them -- and for those that did participate, several treated it like their personal Christmas club accounts, borrowing as much as possible as often as they could!

So as the CEO, you were able to see what everyone's percentage contribution was?

 

[John23]

I think the old plan of, working 9-5, save 10-15% of your income, "invest" (gamble in the market?).....then through the "magic" of compounding.....you're suppose to ride off into the sunset in 40 years.....is anyone starting to see the flaws in that system?

-The government can keep shuffling things around with taxes, schemes, bailouts to pay for.

-Corporations can keep shuffling things around.

It opens you up to endless pitfalls, headaches, disaster (stocks crash right before you retirement?).

I think you should save like mad early. In your late teens, early 20's. You get free rent at home, and have minimal expenses. Like saving, 80-90% of your income. Then figure out your payments and living within your means.

And you need to figure out renting vs owning early. I know one woman...in her early 70's, a former college professor, you'd think it'd be a good profession and you'd be set for life. But she rented, 10-15 different places? in the last 20 years, within about a 60 mile radius.

She ends up with nothing to show for it. Vs buying even a modest house and you end up with an asset.

Even if you have to drive more, or gas, or anything. That doesn't compare to a lifetime of rent payment, vs a home.

 

[tmm99]

My mother finally retired for good last year at 83. By then she could no longer drive due to macular degeneration and although undiagnosed at that time she also was suffering from dementia. She definitely could afford to retire but just would not.

Of course, this is the depression generation and although she has virtually no short term memory, she can remember $ every time. She can't remember where she went to lunch after church, who else was there, who drove her home, what she ate.., but she can tell me she spent $4.19.

Furball, your $ story made me chuckle.

Can you tell me what she did (work wise) until 83 years old?

tmm

 

[DangerMouse]

"We have a friend who has wiped out his 401k because he is too lazy to work"

I'm glad you're not my "friend".

b.

Don't worry mate - the feeling is mutual from what I have seen you post I probably wouldn't want you as a friend either.

You know sometimes part of being a friend is calling someone on their behaviour. You might think it is acceptable for someone who could earn $150k a year with benefits to quit his job when he has no savings and a mortgage to pay and leave it up to his wife to continue working and struggling to work out how to make ends meet on her $40k salary. I don't think it is ok to raid your 401k when you are mid 50s with no other savings and no inclination to work and use the money to take 4 overseas trips to run marathons. I think it is a bad decision and as a friend I believe I should tell him so. Unless he wins the lottery he is going to have a miserable retirement.

 

[dinodino]

So as the CEO, you were able to see what everyone's percentage contribution was?

Yes, the CEO can see everyone's contribution. It's all detailed in the compensation plan reports. For small businesses, the CEO is often the plan administrator as well (I was).

 

[youbet]

One thing I've enjoyed about this forum is finding like-minded folks to relate to.

Yeah, it's great to have like-minded folks to gossip with about people living their lives differently than yourself!

There seem to be no threads as popular as threads where someone criticizes someone else's lifestyle and others jump in to pile on!

 

[Independent]

Wondering if taking money out of 401k early is always a bad idea? Let's say an engineer with GM loses his job on Jan 1 when the company folds. Biggest problem is paying mortgage monthly with no job or Mcdonalds/Walmart job making $20grand a year. If the choice were foreclosure or withdraw $100,000 to payoff mortgage, I would likely choose the latter. Plus, even with the 10% penalty, taxes would still be manageable with the current low income level.

I'll agree with this. Money is fungible - it's all the same. If you "need" to spend, you get it from the cheapest source. Cashing out your 401k is cheaper than piling up credit card debt.

OTOH, the big problem is separating needs from wants. This board is full of LBYM types who would love to educate their friends and family on the difference (I'm one of them).

So I'll go ahead and get my pet peeve in. I see lots of media discussion on saving, and contributing to your 401k, and investing wisely. I don't see nearly as much discussion of the notion of getting out of debt. If I had the ear of the "average" American, I'd say you should focus on your GOOD Date (Get Out Of Debt Date). When do you plan to be completely out of debt? Age 50? Age 45? Age 65? It's foolish to think that you are "saving" until your debts are gone.

 

[Gardnr]

Yeah, it's great to have like-minded folks to gossip with about people living their lives differently than yourself!

There seem to be no threads as popular as threads where someone criticizes someone else's lifestyle and others jump in to pile on!

Oh yeah, and you're just as pure as the wind driven snow. GMAB

 

[Lazarus]

I'll agree with this. Money is fungible - it's all the same. If you "need" to spend, you get it from the cheapest source. Cashing out your 401k is cheaper than piling up credit card debt.

OTOH, the big problem is separating needs from wants. This board is full of LBYM types who would love to educate their friends and family on the difference (I'm one of them).

So I'll go ahead and get my pet peeve in. I see lots of media discussion on saving, and contributing to your 401k, and investing wisely. I don't see nearly as much discussion of the notion of getting out of debt. If I had the ear of the "average" American, I'd say you should focus on your GOOD Date (Get Out Of Debt Date). When do you plan to be completely out of debt? Age 50? Age 45? Age 65? It's foolish to think that you are "saving" until your debts are gone.

I don't think it matters if you have debts as long as you have enough assets to pay them off. I saved in my 401K rather than paying off my house early. Much better tax advantages. Getting less so now that I cannot deduct interest on the house any more.

 

[Independent]

I don't think it matters if you have debts as long as you have enough assets to pay them off. I saved in my 401K rather than paying off my house early. Much better tax advantages. Getting less so now that I cannot deduct interest on the house any more.

I'll agree with this. My post was a tangent on the thread so I didn't want to make it too long.

For most people, the debt/savings combination that works is a 401k and a mortgage. If the loan is on a credit card, or the saving is taxable, the numbers are likely to be different.

If I were advising someone who can do the math, I'd recommend looking at savings minus debt and focus on when that number will turn positive. I'd remind them that they need to take a haircut on the traditional IRA/401k assets to reflect the taxes they'll pay when they withdraw.

I think that some people will discover that they are on a path that will keep them net debtors until 60+, and that may help them understand their financial situation.

If I were making tax law, I'd get rid of the complexities in the tax law that simultaneously give people incentives to borrow and incentives to save.

 

[old woman]

Two working adults can retire on two social security checks if they don't have high expenses. Say they get 1,500 each that is 3K per month without a mortgage they will be fine. The problem is when one dies and the other is left with only half the income but the bills aren't half. They have one less person to feed and cloth but if they were sharing a car the widow/widower is left with the car insurance bill and other expenses, property taxes might not go down if they already got a low income elderly discount. Utilities are the same amount and if they start needing medicine or have a home or car repair they can't recover. So even if you see a 75 year old couple living fine on SS they might get in deep trouble later also they might have a part time job or grow a garden when they are younger retired but can't at 80.