Americans are withdrawing their 401k money early - experts are calling it "a flood"

[Liberal_in_LA]

http://mobile.nytimes.com/2014/10/25/your-money/401ks-and-similar-plans/combating-a-flood-of-early-401-k-withdrawals.html?referrer=

In a paper he wrote with a colleague, he noted that industry veterans tend to refer to these retirement withdrawals as “leakage.” But as the two of them wrote, it’s really more like a breach. And while that term has grown more loaded since their treatise appeared last year and people’s debit card information started showing up on hacker websites, it’s still appropriate. Millions of people are clearly not using 401(k) plans as retirement accounts at all, and it’s a threat to their financial health.

“It’s not a system of retirement accounts,” said Stephen P. Utkus, the director of retirement research at Vanguard. “In effect, they have become dual-purpose systems for retirement and short-term consumption needs.”Which is all fine and dandy for the well-heeled and the frugal. But one of the biggest problems with these accounts has nothing to do with how much we can put in. Instead, it’s the amount that so many people take out long before they retire.

Over a quarter of households that use one of these plans take out money for purposes other than retirement expenses at some point. In 2010, 9.3 percent of households who save in this way paid a penalty to take money out. They pulled out $60 billion in the process; a significant chunk of the $294 billion in employee contributions and employer matches that went into the accounts.

These staggering numbers come from an examination of federal and other data by Matt Fellowes, a former Georgetown public policy professor who now runs a software company called HelloWallet, which aims to help employers help their workers manage their money better.

[Dirty Socialist]

1. My wife and I have pulled some money out

Because I am underemployed and my wife has been looking for a job for a year and a half. Her unemployment ran out (thanks for fuck-all nothing, GOP) so we need money to pay the mortgage and our daughters' braces. We need the money NOW.

[DCBob]

2. I drained mine a couple years ago.

Lost job, divorced, moved around.. now have new job, remarried trying to build it back up but it's a difficult slow process. The 401k system for retirement doesn't work for most of us.

[Lochloosa]

3. My father retired from GE 25 years ago. Pension, medical. The works.

Anyone else see that in their future?

[Dirty Socialist]

4. I know of GE workers in Cincinnati

I don't know about their retirement plan, but their medical plan sux nowadays.

[Yupster]

5. About the only workers who retain Defined Benefit Plans

are government workers, and that won't last for ever as taxpayers will not forever pay for something they can't have themselves.

[neverforget]

11. I have a pension and my wife too because I work for a railroad. I consider

myself very lucky to have it. And I would like to thank my union and those who came before me for negotiating these benefits.

[freshwest]

18. I have it, but I lost the medical. It was touch and go there for a while, with quarterly scare mail

saying we might end up having to depend on the PBGC (Pension Benefit Guaranty Corporation) because company revenue was down and there might not be enough to pay the many thousands of those retiring.

Our defined benefit program was negotiated by our union. Things were up in the air until the company offered nearly $10 billion to fund the program to prevent the government getting into it. The US Department of Labor approved their infusion and we are back on track to getting our regular pension.

As part of a deal made some decades ago, the federal government came calling for the massive retirement fund and got a lump payment from the company with promises that we would recieve Social Security to equal the amount negotiated. The only reason I don't get medical is that I had to go home early.

The amount the company pays would be a paltry sum to some, but a lot to me and I never worked for the government. They seem to be in worse trouble than most with so many raids on their funds, not sure they are eligible for Social Security, but I may be wrong about that.

Most of the company's younger workers are in the 401Ks and many take the money out early. I see a lot of problems with these programs since the 1980s. The defined benefit that I signed on for appears to be gone now. In its place, there are a few dozen plans managed by unions and other things that I don't understand at all.

I'm not sure what other vehicles for retirement security younger workers are using, and don't know if they really expect that Social Security will be a large part of their plans. I see many who are living very well and investing in many things I was never able to afford. Some are taking on large mortgages and make more monthly than I ever dreamed of making.

More families who can do so, are now living more than one or two generations in their homes, I know several with 4 generations under one roof. So lives are going to be ordered much differently than they were for many years.

Is your father still being funded at the promised rate, and is it taking care of all his needs? I'm not familiar with GE's track record of taking care of its retired workers. I've read ome retirees have lost everything over the years.

[KentuckyWoman]

41. My Dad died 4 days before his retirement date from GE

There was a small life insurance payout but my father signed up for reduced benefits so Mom would have something and she got nothing. You can guess I'm not a big fan of defined pension benefit plans. I'd rather wages be better, personal retirement accounts be insured and medical care insurance be universal single payor.

[Live and Learn]

43. Your father should have had more life insurance

which is usually offered fairly cheap for group policies. As a government worker, I have a defined contributory pension plan and plenty of additional life insurance.

If I were to die before retirement, my spouse would get everything I contribute to the retirement plan and plenty of insurance money. If I retire first and then die before my spouse, my spouse will be entitled to a percentage of my retirement chosen by me but not less than 65%.

I am extremely happy with the plan and believe everybody should be covered this way.

[maced666]

6. It is a gauge of continued souring economy.

Proof.

[justgamma]

7. Daughter lost half

of her retirement in her divorce decree to her deadbeat ex husband who never worked. I was furious.

[BrotherIvan]

8. Who could have possibly known?

And yet we are supposed to cheer for the amazing recovery!

[rhett o rick]

9. With due respect, if you have your money "invested" in Wall Street, and don't recognize that

Last edited Sat Oct 25, 2014, 12:17 PM - Edit history (1)

you are gambling, you are being fooled. Just sayin'. It's like going to Las Vegas and giving your cash to someone you don't know and asking them to bet it for you. Of course they get a cut whether you win or lose.

Buying stocks is gambling and not investing.

Edit: Sorry, I shouldn't call people fools. I am not Mr. T.

[KingCharlemagne]

12. I must respectfully disagree with you here, at least

on purely financial terms (issues of the morality of stock ownership notwithstanding). Over the long haul domestic stocks return on average about 10% per year, far superior to the returns on bonds or savings accounts (or stashing cash in the mattress). I think the key is for workers participating in 401-K plans to make sure their investment choices match their (true) risk profiles. For example, if they think they might need the money before retirement, workers should dedicate a far greater percentage to money market funds, where safety of principal is almost as good as it is for U.S. FDIC-insured savings accounts. When I was working and contributing, I frequently adjusted the % I was putting into Money Market accounts in a contrary direction to the overall market. That is, if the stock market went up 20% in a single year (as it did a couple times during the first decade of this century), I drastically increased the % I was putting into money market funds, so as to decrease my exposure to risk from bubble-fueled speculation.

I would also note that 'buying stocks' of individual companies tends to be far riskier than investing in mutual funds or exchange traded funds, which hold a basket of a large number of companies. When I did buy shares of stocks in individual companies I liked to buy the stocks of 'socially responsible companies,' i.e., those whose labor and\or environmental practices marked them out as relatively progressive. By the same taken, I tried religiously to avoid socially regressive companies like Halliburton, WalMart and McDonalds. It's not easy when the 401-K plan requires you to invest in mutual funds over whose holdings you have little or no control. But it can be done with sufficient study and planning.

I would finally note that Democratic supporters Warren Buffet and George Soros would never call what they do 'gambling.' They would call it 'investing.'

[Algernon Moncrieff]

14. Buffett is a harsh critic of the "gambling" side of the market

Derivatives, especially.

Buffett views buying a stock as buying into a business. He only buys businesses he understands; have transparent management; and are reliably profitable.

The market is a game of long term averages. Over time, money invested in an index fund will double, on average, every 7-8 years. You can't get those returns from the banks, bonds, or metals. Real-estate is the only other investment that, over time, comes close.

[KingCharlemagne]

15. Buffett has also stated that his preferred time period for holding a stock is 'forever'. I've

always liked that attitude. That is the antithesis of speculation (or what the person who posted origianlly called 'gambling').

[rhett o rick]

22. I should have said "speculation" in lieu of gambling. Choice of words is important. No one would

admit they gambled their life savings, but no one has a problem saying they "invested" their life savings. I know people that needed some of the life savings between 1990 and 2000 only to find the value had significantly diminished. They couldn't afford to wait out the cycle like Buffet. So the average of 10% market gain didn't mean anything to those in the 99% that lost money during the down cycle. Of course the 1% took advantage and their gain was more than the average 10%.

[KingCharlemagne]

26. Fair enough. I will say again that workers need to make sure their choices about

where they put their retirement money should match their (true) risk profile. Meaning workers need to do some serious self-scrutiny to determine how able they are to sustain losses. The less fortitude or tolerance they have, the higher the percentage of their funds should go into Money Market funds or their like (short-term bond funds, etc.).

And it should go without saying that, as workers near retirement age, they shift funds out of equities and even bonds and into the Money Market arena, so that their exposure to market volatility is sharply limited or reduced.

In addition to having qualms about the morality of private ownership of the means of production, I also have serious moral qualms about a system that requires workers to learn about stocks and bonds. I mean, at a certain level it's kind of fun -- especially if you like or enjoy math -- but it also gets to be deadly boring. I've thought of marketing a stock market guide under the rubric of being a sure-fire cure for insomnia!

[rhett o rick]

29. Your screen name is an odd choice for a democratic socialist.

I would like to pursue this discussion more: "In addition to having qualms about the morality of private ownership of the means of production, I also have serious moral qualms about a system that requires workers to learn about stocks and bonds." While I am highly critical of the Stock Market, I recognize the limits for individuals (non-wealthy) to put their savings to work.

[KingCharlemagne]

31. Ha-ha. Touche. I meant to sign up as "KidCharlemagne" in homage to the

Steely Dan song by the same name. Typed in 'KingCharlemagne' (maybe a Freudian megalomaniacal typo?) and didn't catch my mistake before clicking on the confirmation button.

I now think the best and most efficient way to guarantee everyone a secure retirement is through some form of Guaranteed Annual Income (or 'negative income tax'). Being that I ALWAYS line up with workers, I'm not sure workers should have to take any risks at all with their retirement. And, as we've already discussed, the stock and bond markets do have risks. But I've also come to quesiton whether it is moral for one person to profit off the labor of another. Hence Democratic Socialism.

[rhett o rick]

36. If you typed "king" in lieu of "kid", it's a wonder you managed to get Charlemagne correct.

I assume it's correct, I am not that great a speller.

I think that Social Security should start at a younger age and cover enough that a person can live. I also think we should have coop banks were we might be able to get a decent return for our money. Cut out the bankster leaches.

[KingCharlemagne]

37. I'm getting to be an old fart, getting absent-minded in my dotage. It's a wonder I can

even figure out how to turn my laptop on!

The U.S. missed a golden (npi) opportunity in 2008-09, when the big banks started failing, to nationalize them and expropriate their assets in the name of the people. Instead, with the bailout(s), we got a perverted form of socialism (where ownership and rewards remained private but risks were socialized). The crisis of 2008-09, eminently predictable and indeed inevitable in a capitalist economy, has led me to believe we're only one or two more systemic crises from the entire capitalist system crashing down to be replaced with (I hope) democratic socialism. I doubt I shall live to see it, but I never thought I would see the USSR collapse or counter-revolutionary forces derail the Chinese revolution. So what do I know?

[JDPriestly]

19. When you put in only a few hundred to a few thousand dollars a year into a 401(K),

you are gambling, not investing. If you have a lot of money, enough to weather a recession, enough to have enough votes in a company, you can be said to be investing. But when your income in spite of your frugal spending habits and your commitment to saving permits you to put in and save only very little at at time, then you are gambling. Better wish for luck because you do not have the money to hire the really sharp analysts who use the best computers and understand the algorithms well. You're just playing in the little leagues and you have a huge handicap. Sure you will do well at times. You may even come out ahead in the end. But you may very well not do well and lose. It all depends on your timing and your luck.

I'm not a fan of the stock market. Not with the current rules anyway. And I especially do not like or trust CNBC. What a bunch. That's just my opinion of them. I just don't like them at all.

If you have a lot of capital like Warren Buffet or Soros, it is a different matter. You are a market maker as they say. You may be able to influence how a stock does. Why? Because you have leverage. You won't always be able to have the influence you might like to have. But your "investing" can influence the market. Mine can't.

401(K)s are, in my opinion, a racket.

[KingCharlemagne]

24. Even if you put 100% of your contributions annually into a Money Market account? That's

'gambling'? Maybe we're engaged in a battle of semantics here. But where should workers put their retirement funds, assuming they have a defined-contribution plan like a 401-K?

[spinbaby]

34. What's your money marke account earning?

Enough to keep up with inflation? I didn't think so.

[KingCharlemagne]

35. You'll get no argument from me. The money market account is perfect when

safety of principal is the main concern (even though inflation risk, as you note, always hides in the weeds).

[rhett o rick]

20. What is investing? Some say it's purchasing something with the hope of

profit. Of course inherit is the possibility of loss. That is very close to the definition of gambling.

After the initial release of stock your "investment" does not go to the company. It makes little moral difference if you "invest" in green stocks or WalMart. They don't see a dime of that money.

You essentially buy a ticket, like at the race track, and hope your "stock" is in the lead when you sell it. While the value of the stock may have some relation to the performance of the company, it is essentially a measure of the popularity of the stock.

When you "invest" in the Stock Market you are exchanging money for stock with another "investor". While you are betting the value will go up, he/she is betting the value will go down. This is clearly gambling.

The average "investor" is at a large disadvantage as the Big Money investors have inside knowledge and also can manipulate stock prices. The average of 10% gain you quoted is shared between the Big Money "investors" and the average Joe. Guess who gets the biggest share of that 10%.

[KingCharlemagne]

21. When one buys a share of stock in a publicly-traded company, one is becoming

a part-owner of that business and its rise and fall in fortunes.

I think there is a qualitative difference between owning a share of stock, i.e., being an owner, of labor-friendly CostCo and owning a share of stock of labor destroyer WalMart. Do you disagree with that statement?

Truth to tell, I am now a Democratic Socialist and I now have major moral reservations about the private ownership of the means of production. But I am attempting to explain the capitalist rules of the game as they themselves understand them.

Let me ask you this: is there any publicly-traded -- meaning shares available for purchase on the stock exchange -- company of whose business practices you approve? Or do you damn CostCo with the same fervor with which you dman WalMart?

[rhett o rick]

27. When you buy a share of a company from another individual you are not "investing" in the company.

The company does not see a dime of your money. The person you bought it from gets the money. The value of the stock is based on it's popularity. That popularity can be influenced by the performance of the company but it can also be influenced by a lot of other things. For example, a number of years ago it was discovered that Wall Street Journal advisers were influencing stock prices and cashing in. They would tell people that they recommended a certain stock then they would buy a significant quantity which made the price go up. When the public saw this, they took the advice and drove the price up further. Then the advisers would cash out at the higher price. Of course the price would return to normal and those that "invested" on the way up, lost value. My point is that the value of the stock increase had nothing to do with the performance of the company. CEO's have been found manipulating the value of their company stock via business practices and cashing in via their stock options.

[PowerToThePeople]

39. what you describe is known as a ponzi scheme. n/t

[rhett o rick]

40. I think the Stock Market operates as a pyramid scheme with frequent "adjustments" which is code for

all the common people lose their "investments".

[TheFarseer]

10. ive never taken anything out

But after 9 years of putting in 5percent I've only got about a year's salary. Based on this' I'd have to say I may not end up with enough to retire on with just the 401k. I think not having enough in our 401k accounts will become a crisis eventually. Especially if social security keeps getting less and less adequate for retirees.

[Algernon Moncrieff]

13. I'm 49, and I figure to be working until I'm 75

I moved my 401K money out of equities and into bonds back in Spring. So far, it's been about a wash. I still am looking for a downward correction. When the market does correct, I may withdraw all my 401 K money, and reinvest it into a Roth 401 K. I'll lose about a third of what I've got, but what I end up making on the investments over the next 25 years, I'll get tax free.

The people I've seen take the worst beatings in the market on retirement accounts had one of two bad things happen. In some cases, I saw people whose 401K was wholly or principally in company stock. While employee stock plans can be a nice benefit, you never want all the eggs in one basket; if your company tanks, there goes the retirement fund. I also saw people who had big nest eggs; were close to retirement; and then kept their money in inappropriate funds too long, instead of reallocating to safer investments.

[LiberalElite]

16. I'd like to take it out of the 401K before the next crash -

in fact if they're going to cut my job (and they well may) I wish they'd do it while I still have some money to live on.

[liberal_at_heart]

17. My husband and I have had to pull some out, and I wouldn't be surprised if we have to pull more out.

We're only in our late 30's.

[Wounded Bear]

23. Spent mine years ago...

just trying to survive. Thankfully, Repubs haven't succeeded in trashing my SS yet. It's nearly all I have to survive on.

[randome]

25. I have around $3000 left.

I cashed in one account 4 years ago to finance a house for my daughters. My ex took the other one (not that I disagreed with that.)

I used another for a short period of unemployment and another to help pay attorney expenses related to my ex's increasingly strange legal motions (which I do blame her for, and for which she has failed, as costly as it has been for us both).

I was just hired by the company for whom I consulted and I opted not to participate in a retirement plan because I have 2 daughters who will have college expenses next year.

So it will be Social Security for me and hopefully the largess of my successful daughters at some point in the future, should I need that.

Ah well, it's a strange world, no?
[hr][font color="blue"][center]"There is a crack in everything. That's how the light gets in."
Leonard Cohen, Anthem (1992)[/center][/font][hr]

[Avalux]

28. You know what? It's OUR money.

I don't think there should be a penalty at all to pull it out, especially if forced to do so by an employer! As it is now, that money gets taxed twice. It's obscene the $$ made off of 401k early withdrawals. People need their money sometimes; financial hardships are real. If I'm in danger of losing my house, that's all I care about. So now they want to make it even harder for people get their money.

Are we really supposed to believe these experts care about our financial health? The 401k; the pension replacement that's tied to the stock market, is not the golden egg we were led to believe. It's nothing but a way to make money off of the working class, then tax them if they really need the money before they reach the designated age.

[A HERETIC I AM]

33. You can not be "forced" to pull it out by an employer.

And any "$$ made off of 401k early withdrawals " as you put it, goes to the IRS.

I understand your point about it being difficult and/or expensive to withdraw from a 401(k) early, but the IRS penalizes early withdrawals in order to discourage them.

You are always free to place a bare minimum in such a plan and otherwise avail yourself of a standard investment account with which you can add to and take money from as you wish.

[ileus]

30. We can loan ourselves money from ours.

[hobbit709]

32. If you are a few years short of collecting SS

with no job or a shitty paying one, then you do what you need to do until you're 62.

contrary to what some people think, the economy is NOT all that wonderful for a lot of people.

[malaise]

38. Better they take their money early than allow the criminals to loot them n/t

[greatlaurel]

42. Bingo!