BORROWING FROM YOUR RETIREMENT PLAN IS A BAD IDEA
September 4, 2008
Recent research shows that borrowing from retirement plans is an increasingly popular trend, but not necessarily a good one, says the Examiner.com.
- According to Fidelity Investments, 40 percent of workers in Generations X and Y cash out their workplace savings plans when they change jobs.
- A July 2007 report from the Center for American Progress (CAP) states that as the housing crisis grips the country, more and more individuals are tapping their 401(k)s. People are turning to their retirement savings to help meet rising costs of homes, food, energy and health care.
- But even a small loan of $5,000 could significantly cut a worker's savings: a 401(k) plan participant who takes a loan and makes only the loan payments, reduces their total retirement savings between 13 percent and 22 percent.
- The National Center for Policy Analysis offers another illustration: A 35-year-old worker who borrows $30,000 over five years from a 401(k) plan with $60,000, for example, could end up shrinking his retirement income by $30,000 a year.
Given the dicey economy, says Examiner.com, it makes sense that workers are seeking refuge in their retirement savings, but even in extreme situations, it is best for workers to seek other sources of capital before tapping their 401(k) accounts. Otherwise, borrowers are leaving much of their potential earnings on the table, and a small loan can equal to a huge loss in future retirement security, warns the NCPA.
In the meantime, CAP is urging policymakers to step into the fray, suggesting they come up with policies to improve income growth and provide health and unemployment insurance to workers unexpectedly facing health issues or layoffs.
Source: Kristina Cowan, "Why borrowing from your retirement plan is a bad idea," Examiner.com, September 2, 2008; also: Robert Reeves and Pamela Villarreal, "401(k) Loans = Retirement Insecurity," National Center for Policy Analysis, Brief Analysis, No. 615, April 25, 2008.
For NCPA Brief Analysis:
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