| by Dr. Jeffrey Lant Need money for college tuition? To stave off eviction or foreclosure? To buy a home? If so, you may look longingly at the funds currently residing in your 401(k) program. These funds are needed, you reckon, and are near, so temptingly near. Should you use them now... or hold off? The best advice is look, but don't touch. Leave them alone... let them get on with the job of securing your comfortable future. Unfortunately millions of people will disregard this advice. Record early withdrawals According to Fidelity Investments of Boston, Massachusetts, one of the world's largest retirement plan administrators, 62,000 plan participants took out so-called hardship withdrawals in the second quarter of 2010, up from 45,000 in the previous quarter. To make a hardship withdrawal, people must demonstrate an immediate and heavy financial need. What's more, the number of people taking loans from their 401(k) is at a 10-year high, again according to Fidelity. Of the over 11 million people with retirement funds analyzed by Fidelity, 22 percent had loans outstanding. These numbers are consistent across the retirement plan industry and indicate a whole lotta raidin' going on. "It's the economy, stupid!" Why all the retirement plan withdrawals and loans? In former president Bill Clinton's famous phrase: "It's the economy, stupid!" People are doing it because they have to... not because they want to. Right? Right? Not so fast! The truth is, people need money, see money in their retirement accounts, and tap it without thinking too long or deeply about what they're doing... and the long-term implications for their golden years comfort and security. Now hear this: before you raid retirement accounts, do everything -- and I do mean EVERYTHING -- to avoid doing so. Robbing Peter to pay Paul may be easy... but you won't like the results when you're aged and really need the money. Rule 1: Don't touch your retirement money. If you're lucky you get old. If you're luckier you get old without financial worries. In short, you get a stretch of truly golden years. But to make this happen, you'll need the money. That's why you cannot afford to raid your retirement accounts. They are there for an inviolable purpose and must be treated accordingly. So, what's a money-needing person to do? Start looking at, really perceiving and minutely scrutinizing your current financial situation. * Hold a family meeting. Be clear that everyone in the family understands the situation and the job at hand: minimize expenses, maximize savings, save the retirement accounts. * slash credit cards. Keep one, scissor the rest. * defer purchases. Make do with what you've got. * make sure that every family member who is old enough to have a job, has one. Teen-agers should be at the mall all right.... but with a job! * clean out basements, garages, attics. Give the stuff away to get charitable donations... or have a garage sale! Remember, the goal is to maximize cash, minimize and rigidly control spending... and keep your mitts off the retirement funds. When you still need more. Borrow against your retirement account. Don't cash in. If you have honestly made the effort to maximize cash and control spending and it still isn't enough, move on to this stage and borrow. Take this step only after due deliberation and sober reflection because it can put you on a very slippery slope. The key is whether you will be able to pay back any loan within the time permitted by the retirement plan company. Be honest with yourself. Be very honest! If you are clear about your ability to pay back the loan, then proceed accordingly. But don't deceive yourself. What you are doing may be necessary, but it is only desirable when compared to your other, even less desirable options. Like this one... Consider bankruptcy These days there is hardly any stigma (if any) when you go bankrupt. It's a straight forward business decision. One reason for considering it is that all retirement fund assets are protected by law when you do so. Thus, protecting retirement funds becomes one important factor in the decision to use bankruptcy. This is exactly the reverse of what most people do. They use retirement funds to stave off bankruptcy, when they should do just the opposite! Still need money? Really need money? You've now reached the point where tapping those retirement funds may be an option, regrettable though it is. Hold your nose and proceed. Do this because you must; do this because you have run out of other alternatives. Every dollar you remove may be necessary, but it is not desirable. But at least by following the recommendations in this article you retain the greatest number of dollars in your plan. For that your older self years ahead will thank you and be grateful that you were as conservative as possible in this difficult situation. Amen! |
