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Man the 401k lifeboats...
Old 01-23-2013, 04:41 PM   #1
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Man the 401k lifeboats...

I knew 401k plans leaked but I had no idea they were taking on water this badly:

Quote:
One in four American workers with a 401(k) or other defined contribution plan tap their retirement account for current expenses, a new study shows. This so-called “leakage” reached $70 billion in 2010, equal to nearly a quarter of all contributions that year.
401(k) Plans Leaking Cash at Alarming Rate | TIME.com
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Old 01-23-2013, 04:46 PM   #2
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Ouch !
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Old 01-23-2013, 04:53 PM   #3
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No kidding, ouch.
And this isn't just loans... this is early withdrawals.

But I've seen a lot of people do it. Lose the job, no emergency fund, spend the 401k money instead.
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Old 01-23-2013, 04:57 PM   #4
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Here's a recent Washington Post story, entitled "401(k) breaches undermining retirement security for millions", quoting the same study.

Check this blog entitled '401k savings plans are for suckers' written from an HR perspective - an infographic states that 1 out of 2 live 'paycheck to paycheck'.

Truly frightening.
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Old 01-23-2013, 05:07 PM   #5
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A couple of years ago my (then) sister-in-law raided her little 401(k) to put toward her only daughter's wedding. She netted about $4,000.

I don't know what appalled me more: 1) that she raided it for the wedding, 2) that she didn't know about the penalties and taxes, or 3) that she had so little to show in her 401(k) after having worked for 15 years or so. (She was a SAHM for quite some time).

Shortly thereafter, she and my brother got divorced. I knew it was coming, I told her to watch out for herself, and I let her know I would do anything I could to help her out with financial advice because I knew she needed it sorely.

I know she didn't come out of that very well.

She doesn't speak to me these days, but at least she's still friends with the stinker she divorced.
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Old 01-23-2013, 05:08 PM   #6
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One in four American workers with a 401(k) or other defined contribution plan tap their retirement account for current expenses, a new study shows. This so-called “leakage” reached $70 billion in 2010, equal to nearly a quarter of all contributions that year.
Or how to insure you will not FIRE.
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Old 01-23-2013, 05:12 PM   #7
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Just as a side note I have been preparing tax returns for the past five years or so and can attest to a bunch of folks cashing out their 401Ks. Thank God most plans require 20% to be withheld or most of these folks couldn't cover the 10% penality.
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Old 01-23-2013, 05:19 PM   #8
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I took a $10,000 loan from my TSP in 2008, but within less than 6 months, I had it repaid. Haven't touched it since.
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Old 01-23-2013, 05:51 PM   #9
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Originally Posted by frayne View Post
Just as a side note I have been preparing tax returns for the past five years or so and can attest to a bunch of folks cashing out their 401Ks. Thank God most plans require 20% to be withheld or most of these folks couldn't cover the 10% penality.
I've been unemployed for 15 out of the last 18 months. I had an emergency fund but not enough to cover this. So I have taken money out of my rollover IRA. If I am still unemployed in the 4th quarter of 2013 I will take out enough from my IRA to put my income up to $9500. That is the total for deductions and exemption so I wouldn't be taxed anything for that money. I just have to pay 10% penalty for federal and 3.3% for state. Good thing I have low expenses so I can get by only taking out $9500 this year. Next year if i'm still unemployed(I better not be)I can take out the $9500 plus another $5000 from my ROTH. It's nice not paying any taxes but i'd rather pay a high tax on a high earned income than no tax on no earned income.
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Old 01-23-2013, 07:06 PM   #10
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I'm not surprised by this. Wages have been flat since the 1970s, when indexed to inflation. Many middle class folks (not all) have been struggling to get by for several years now.......borrowing from their 401ks and living on credit to get by. These are not all people who are spending money foolishly, either......quite a few are using the money for normal day-to-day expenses (food, rent, etc). I see it all the time around here. Let's face it, a majority of the wealth being accumulated in the USA today is going to the wealthiest 3-5% or so, and if anything that trend is accelerating. A majority of the jobs being created today are low-paying, and many are part-time. Good luck trying to support yourself on a job like that (much less supporting a family).
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Old 01-23-2013, 07:27 PM   #11
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I can be done 'relatively' responsibly, at least that is what I tell myself. I borrowed twice from my 401K....once to bail my sister out of debt and pay off her credit cards to the tune of $12000 15 years ago and once 2 years ago as I found myself in a small cash crunch in September due to some unexpected bills.

My sister only paid me back about 30% of the $12,000, but it was well worth it as she got her act together, got through vet school and is now a productive member of society (I consider it an obligation to loan money to close family once, only once).

I am still paying back the $4000, $50 bucks a paycheck for 4 years. I could pay it off with my tax rebate check, but why bother.

Borrowing money from a 401K is not bad, because you end up paying yourself interest, especially if you are saving interest somewhere else (I used the $4000 to keep from carrying a balance on my credit card. I have only carried a balance one month in the 30 years I have had a credit card).

Taking pre-59.5 distributions....that is another story. I would never consider that, unless an extinction event asteroid was heading towards earth.

(401K just passed $800,000...2 stops to $1 mil)
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Old 01-23-2013, 09:01 PM   #12
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Given the unemployment rate and length, I think the 2010 numbers are not likely to be typical. I hope.
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Old 01-23-2013, 10:48 PM   #13
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one of the gals who works for me just raided her husband's 401k account to buy him a car. I told her she was a fool. but, at least it was his 401k and not her's.
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Old 01-23-2013, 11:32 PM   #14
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Originally Posted by ronocnikral View Post
one of the gals who works for me just raided her husband's 401k account to buy him a car.
Wow, what a bad idea. Actually, I think it was a really stupid idea.
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Old 01-24-2013, 05:30 AM   #15
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Given the unemployment rate and length, I think the 2010 numbers are not likely to be typical. I hope.
My own experience informs us about the future I think. I didn't lose my job, but, adjusted for inflation, I'm making 16% less now than when I was hired over twelve years ago, and that's despite two promotions. Whole portions of the economy are being transformed into places where even those "doing well" aren't really doing that well.

And here's a discussion thread from yesterday about an article about this sort of thing happening more generally:
Middle Class[Income] Jobs ain't Coming Back?
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Old 01-24-2013, 06:34 AM   #16
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I let it slip yesterday to a couple of coworkers that I'll probably hang it up in a year or two. They were absolutely shocked as I lead a pretty low key lifestyle. At one point one asked me if I recently got an inheritance. They then proceeded to discuss how lousy our 401k was and how low their balances were. Bear in mind this 401k offers inst. class shares of Vanguard Index funds, Pimco Totoal Return at .46 ER, and a host of other good, solid, cheap choices plus a good match. I figured it was a lost cause and changed the subject.
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Old 01-24-2013, 11:15 AM   #17
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Better financial education or more forced retirement savings...
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Old 01-24-2013, 01:31 PM   #18
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OMG!!!! One in four 401 or other defined contribution plans are being tapped for current living expenses. That does sound alarming but probably a little less so if you consider that a bunch of the people tapping those accounts are early retirees like many here on this forum. For people who need to and are using money from those plans to fund living expenses until pensions and SS start it is an excellent choice.
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