BORROWING FROM 401(K) PLANS COULD BE A BIG MISTAKE
July 17, 2008
NCPA's New 401(k) Borrowing Calculator Shows It Could Be Expensive
Dallas, TX (July 17, 2008) - Most employees don't realize that borrowing $30,000 from their 401(k) plans could cost them as much as $600,000 in retirement income. Borrowing against a 401(k) may seem attractive, especially in today's economy. The NCPA has developed a calculator that shows just how expensive 401(k) withdrawals can be.
"People don't realize how much retirement money they're giving up by raiding their 401(k) accounts," said Pam Villarreal, NCPA Senior Policy Analyst. "If it's not absolutely necessary for you to borrow from your 401(k) plan, don't do it."
The NCPA 401(k) calculator shows, for example, that withdrawing funds from your 401(k) now is typically not worth the tremendous amount of money you forego for your future retirement security. The calculator clearly demonstrates the impact of borrowing from a 401(k) plan, and can help determine how much a loan will cost in terms of lost savings and investment opportunities.
Imagine a 35-year-old worker who borrows $30,000 over a five-year period, with monthly payments of $583. Assuming no pretax contributions are made during the loan repayment period, if the account were earning a market interest rate of 6.25 percent, he would have $192,794 less at retirement (age 67) than if he had not borrowed. If his account were earning a market interest rate of 10 percent, he would have more than $646,200 less at retirement than if he had not borrowed!
Even in extreme situations, it's best for people to seek other sources of capital before tapping into their 401(k) accounts," said Villarreal, who recommends that before employees touch their 401(k) plans, they access the NCPA's borrowing calculator in order to:
- Make annual comparisons of projected 401(k) balances, with and without a loan, from the year the money is borrowed until the year of retirement.
- Compare monthly income at the time of retirement, with and without a loan, based on a 30-year fixed annuity.
An increasing number of workers are opting to tap into their retirement accounts for reasons including the purchase of a new home, paying medical bills and paying off credit card debt. However, the disadvantage of taking a 401(k) loan is the loss of compound interest and dividends that would have accrued if the money had not been borrowed.
To access the 401(k) borrowing calculator, log on to http://www.ncpa.org/.