Only in the times of the housing slump would this question ever arise. The subject comes from a SmartMoney article. Apparently, your friends and family are borrowing on their 401(k)s to pay for expenses. SmartMoney is taking the stance that the average consumer is struggling in this recession. While there will always be circumstances such as:
I’m an honest worker, with a small house, no credit card, car is paid for, and I lost my job. After 6 months I’ve burned through savings and need to look into borrowing from the 401(k).
That will not make up the majority of people that actually need to borrow money to make ends meet. Here’s the profile of the typical bloke digging into his retirement for quick cash:
I work hard and play hard. I bought a house I couldn’t afford using a bad loan. Now my payments have skyrocketed, the credit card companies are calling daily, and I don’t have any savings. The national savings rate has hovered around 0% since 2005, so I’m right at the average.
Our overunderacheiver here can fix his problem in two steps.
1. Cut the lifestyle. Often, the BMW driving businessman spends a lot to maintain his image of success. This image is what has ruined him. Sell the car, stop going out for lunch, and make a strict budget.
2. Sell the house. If you cannot afford to make the payment on a house at a 30 year fixed rate, you can’t afford the house.
Back to the SmartMoney article, the author provides reasons not to borrow from your 401(k). Most are good and provide some great math to back up their reasoning. My favorite is the fact that retirement accounts can not be tapped by your creditors. So the bank cannot go after your 401(k) for money you owe. Its like stashing cash in a shoe box. SmartMoney also provides alternatives to tapping the 401(k). I don’t like their alternatives as much as I liked their reasoning for not tapping retirement accounts. Here’s two examples:
1. Temporarily halting 401(k) contributions. I don’t like this because that also hurts your company matching. Remember your employer is matching your contributions. Instead consider the IRA contributions because companies are not matching those.
2. Borrow against insurance. Insurance is not an investment, and its not a source of cash. If you have a whole life policy, you should have canceled that already and gone with term.
Check out SmartMoney for the full article. It goes a little deep into the numbers but provides some great insight into how tapping your retirement accounts can affect you.
 By The Weakonomist |
The Weakonomist is the founder of Weakonomics. Clicking the picture of the puppy will tell you more about him. If you like what you're reading consider subscribing to the blog, following him on Twitter, and checking out the related posts below. Please consider a donation if you really enjoy Weakonomics. Also keep in mind that nothing I say can be construed as financial advice. |
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