More people tap 401(k) accounts for cash

[UpInArms]

Source: Associated Press

Trent Charlton knew the risks when he borrowed $10,000 from his 401(k) and cut his retirement savings in half.

But Charlton, a 40-year-old account executive at an Irvine, Calif., trucking company, said he had little choice because he and his wife could not keep up with monthly expenses after American Express reduced the limits on three credit cards.

As home prices fall and banks tighten lending standards, more people are doing the same thing: raiding their retirement savings just to get by and spending their nest eggs to gas up SUVs, pay mortgages or put food on the table.

But dipping into 401(k) accounts can carry risks because defaulted loans and hardship withdrawals are taxed as income and are subject to a 10 percent penalty if the worker is under 59 1/2 years old. That means if the trend grows, many Americans will risk coming up short on retirement savings or may have to rely on an overburdened Social Security system.

<snip>

"That's not a smart strategy. You don't want to apply a short-term fix to a long-term issue," he said.

Read more: http://news.yahoo.com/s/ap/20080219/ap_on_bi_ge/borrowing_against_retirement

[brooklynite]

1. More people are tapping their 401(k) for cash

Source: AP

Trent Charlton knew the risks when he borrowed $10,000 from his 401(k) and cut his retirement savings in half.

But Charlton, a 40-year-old account executive at an Irvine, Calif., trucking company, said he had little choice because he and his wife could not keep up with monthly expenses after American Express reduced the limits on three credit cards.

As home prices fall and banks tighten lending standards, more people are doing the same thing: raiding their retirement savings just to get by and spending their nest eggs to gas up SUVs, pay mortgages or put food on the table.

But dipping into 401(k) accounts can carry risks because defaulted loans and hardship withdrawals are taxed as income and are subject to a 10 percent penalty if the worker is under 59 1/2 years old. That means if the trend grows, many Americans will risk coming up short on retirement savings or may have to rely on an overburdened Social Security system.

Read more: http://www.msnbc.msn.com/id/23241606/

---

I'm willing to lay most of the blame for our current financial problems with the Administration and its supporters, but I'm not sure that everyone affected realizes that they have to take some responsiblity for over-spending as well.

[wiggs]

12. This is one reason why I'm thinking the stock market will not be headed up anytime

soon. Boomers retiring. Others dipping into retirement.

I also think the govt has been worried about this for a while...hence the big administration push for private health accounts and privatized social security; wall street is going to need an infusion of investment before too long.

[roamer65]

2. This will be the next phase of the credit crisis.

Bernanke will have to print trillions of dollars to cover this one.

[seriousstan]

3. The man is a fool and now has to pay the piper. Boo fuckin hoo.

Charlton and his wife used the retirement money and $7,000 from savings to pay down their credit card debt. They also cut monthly expenses by pawning a diamond ring and selling camera equipment he owed money on. And he's looking for someone to take over his $550 monthly payment on a gray BMW 335i he leased last April.

Let's break this down...a 40-year-old account executive who only has 20k in his retirement 401k, carries over 20k in credit card debt AND just last April thought he needed a $550/month BMW 335i. He needs to have his ass handed to him financially.

People like this are why I am looking to find a great deal on my second rental property. This fool will be renting soon and I will be there, living within my means and cashing his rental check.

[DesertFlower]

4. i agree with you. my ex-brother-in-law

who has 2 homes (both mortgaged), a lexis, a hot tub had to borrow from his retirement to pay his share of his daughter's wedding. he knew for over a year that this wedding was coming. i've known him for 30 years and it's always been the same. credit, credit, credit. he's 58 and will never be able to retire.

[kath]

13. And he *leased*, not bought the BMW. Can you say stoopid??

I knew you could.

[bunkerbuster1]

30. It's like they deliberately found the least-sympathetic example possible...

just sayin'.

[Gormy Cuss]

38. They often do in this sort of story.

It's almost as if the writer/editor is trying to distract attention to the underlying cause of a widespread problem (401K loans decreasing retirement income potential) by framing it with an example of a "I want it all now" person rather than someone who can't live any more frugally and now are faced with higher costs, less credit, and perhaps a lower income.

[NashVegas]

47. No, This IS The Story

20k-60k income people going up to their salaries or higher with credit card debt (forget about the mortgage) in order to live like people who are making $120-$250k per year.

[lancer78]

32. With leasing

at least you can turn the vehicle back. Whats worse is being upside down $10K on a car you bought 3 years ago.

[DBoon]

14. Fools like this are the pillar of the American dream (tm)

I bet he voted republican because he believes he is a SUCCESS!

I bet he used to^H^H^H^H^H^H^H still sneers at democrats and liberals as losers.

I bet he looked disdainfully at worker-bees with their paid-off Toyotas

Well dude, you are no better than the rest of us. You are not special. You did not "make your own luck". You are not on the path to success. You are not a "winner".

You learned the hard way.

Or maybe you still haven't learned.

[heliarc]

29. Oh so you're a slumlord too... Alright...

Was there ever any incentive for him to show economic restraint? I thought the mandate was for us to buy more and buy often. Isn't that want helps the economy? -sarcasm- You sound like a "me me me" Ron Paul supporter. So you're a capitalist pig bent on feeding off of the misinformed and the careless. Good luck with that.

[4_TN_TITANS]

35. Well said....

I've been living below my means for years, watching pigs like these whoop it up with good salaries and huge credit lines. It's time they got an ass-shot of reality and knocked down the ladder to where they should be.

[Sen. Walter Sobchak]

36. back when I worked on bankruptcies...

I would see so much of this shit I needed all the self control I could muster to not scream at the people, while many of the bankruptcies were related to illness, divorce, career failure and other issues. A whole lot of them could be attributed to being a fucking idiot and having a runaway sense of personal entitlement and no real concept of what their realistic earning potential actually was. They NEED to have an SUV, they NEED to live in Newport Beach, the NEED to wear designer clothing, the NEED to dress themselves in Abercrombie and Fitch, the NEED a $100 a month cellphone plan and the NEED the twice annual resort vacation. If you make $45,000 a year selling cell phones at the mall YOU CAN'T AFFORD an escalade!

The children of privilage who were bankrupt before they were thirty upset me the most, they who were launched into the world with no student loans, a car and connections only to keep on partying on their credit cards after their parents cut them off.

my all time favorite bankrupt moron was a homosexual who was convinced he would die of AIDS before he was 40 and lived like a rockstar. At 45 and WITHOUT AIDS he had something like $2000 worth of furniture and stereo equipment and nothing else despite having made $80,000 to $110,000 a year over the previous decade.

[flashl]

5. Maybe they setting folks up for this ...

You do not want this debit card in your wallet

Reserve Solutions is marketing a new kind of debit card - one that lets you stop at the ATM and withdraw money from your 401(k). The withdrawals are treated as loans against your retirement account, and you must repay the funds to the plan with interest. Of course, it's being marketed as a convenient way to access your money in a time of need.
DU Post - Economy

[spinbaby]

24. There's also a card that taps your home equity

Another bad idea.

[high density]

6. 40 years old and only $20k saved for retirement?

Sounds like he was screwed anyway.

"And he's looking for someone to take over his $550 monthly payment on a gray BMW 335i he leased last April."

Many of these people dig their own graves. $550/mo lease payment!

[MissB]

8. That hit me too.

40 and $20k.

[salin]

11. At 40 I did not have 20K saved...

had spent a lot of the past 20 years working in nonprofits, back in school, and working the startup of an organization/nonprofit (meaning no income for nearly 2 years - had to work quite a while in advance prior to that time frame to save the money to live with no income for that time period.)

In just five years since that time I have bought (outright - no mortgage - but bought wisely -- a foreclosure in a "transitional neighborhood"), bought a new car outright (first new car ever, no monthly payments and am not paying thousands more over the time of a loan for the financing), and have socked away in retirement savings more than that.

Point being - from the story this guy spent foolishly, no doubt. But at the same time there are circumstances that lead to having less than 20K at 40 that do not necessarily - in and of themselves suggest financial foolishness.

For me, I don't spend much more than I did when I earned salaries that were 1/3 to 1/2 of what I earn now - and my financial "plan" for the past five years has been to drive my monthly costs down as much as possible, so that at much as possible of my monthly earnigs can be "socked away." So far, this approach has let me make up for lost time while earning degrees and 'paying my dues' (per low paying but experience buildin nonprofit work.)

[InkAddict]

21. The foolishness for some was in chosing a career in back-office IT.

Especially in the RustBelt. Software sales reps and high-level marketeers made the loot while computer operators, programmers, analysts, documentation specialists, and engineers jobs headed somewhere else.

401 plans, early on, were not structured for workers who were forced into unemployment or frequent job changes. Early on, hardship withdrawals or loans were also not allowed; one was in or out of the plan. The plans needed to be rolled over and could NEVER be consolidated or augmented into/with any other investments or contributions one might have had/made. Nor were they structured with mandated portability needed to meet the needs of workers who were forced into frequent job changes due to the uncontrolled outsourcing that took place. Eligibility was often set at the minimum of a year of continuous employment, if one lasted that long. Employers, too, ditched their whole teams in one area of the country to set up a brand new team elsewhere. If one was at or near that certain age protected by legislation (LOL), things were even more dicey as far as job tenure went.

The length of time one remained unemployed, months to years, or the number of times one was put "on-hold" awaiting unemployment checks and the all too often computer glitches that postponed the arrival of needed unemployment funds often made the bad choice the only choice for some with family responsibilities, medical and caregiving issues, etc...

[dysfunctional press]

26. oops...make that $10K, now. but i'll bet he still has more saved than the vast majority at that age.

future's gonna be grim, if it gets here at all.

[gristy]

7. How long until the guvmint removes that 10% penalty?

I don't put it past them.

[salin]

9. cutting to the chase... he and his wife spend more monthly than they take in

reading the story it doesn't appear that there was a sudden emergency that spiked outlays. Indeed the article says (incorrectly):They also cut monthly expenses by pawning a diamond ring and selling camera equipment he owed money on. And he's looking for someone to take over his $550 monthly payment on a gray BMW 335i he leased last April.

Er... that isn't cutting down on monthly expenses (i.e., Spending Less), it is cutting down on that month's deficit by creating one-time 'revenues' to offset costs.

There are many folks who are in horrendous circumstances due to medical or other financial emergencies that change the monthly budget picture, but most of the folks highlighted in these stories have made very poor economic decisions. It makes those who read about it who are not yet hurting, feel little empathy. It also points out that in this current era many folks do outspend their incomes and use credit to do so.

Perhaps because I spent so many years working in very low paying nonprofit org jobs and in school - I learned to live on very meager means and ignore a lot of the newest gadgets (that add up over time) - that I only modestly increased my spending after my income finally rose to what I think is more than adequate, but that is less than some at this site consider "comfortable" (all things are relative - and yes I have lived in very expensive oost of living areas such as metro DC and the SF Bay Area). When I read these stories I seriously do not understand how folks so far outspend, on a monthly basis, their incomes. I lived on the edge (where a transmission failure in my older car threw me into a financial anxiety attack) for so long, that whenever I could I built a small (but increasingly larger) "cushion" - at first it was one hundred dollars - then several and now more ... in the bank and able to be tapped in case of a crisis. I think that this mentality has made it almost impossible for me to relate to those who carelessly and regularly spend quite aa bit more than they earn.

[Voltaire99]

20. Well said. This trend is giving rise to ersatz populism.

The irrationality -- nay, the stupid greedy banality -- of so many in the middle class was underwritten by the housing bubble.

Time will tell whether it was yet another cyclical aberration (admittedly record-setting) or whether, as doomsters like James Howard Kunstler predict, it marks a turning point in long-range American fortunes.

Meanwhile, we see the horrible pandering it is producing in Washington. Every pol from Hillary to McCain wants to "save" these shmucks -- and it's easy to see why, as they represent what's left of the voting public.

But it's a false populism. We don't need to help people who can't control their spending, which includes buying houses they can't afford.

We need to reach out to the truly miserable in our society; but as it stands, there are a lot of sociopathic middle class white folk with diamond and BMW addictions who are demanding that they be "helped" first. We should reject their claims and focus on the truly needy.

Let there be no McMansion New Deal.

[GOPNotForMe]

10. This is a looming disaster.

People are incredibly foolish with their money. I am very worried about this.

[seriousstan]

15. Exactly how do you stop people from being incredibly foolish with their money?

You can't! Never could. This goes back to ORC selling ORK an apple for way too many sea shells.

If God hadn't meant them to be sheared he wouldn't have made them sheep.

[GOPNotForMe]

17. Never said you could stop it.

But when our society supposedly has a safety net designed to prevent people from being on the streets once they reach retirement, then I'd say we all have a vested interest in people treating their money with respect when it comes to retirement. How? No clue, that's why I'm not a politician! But I'd say giving people better advice about their money and educating them better would be a good start.

Also, I'm not very up on the farm animal metaphors so you'll have to explain that one to me.

[denverbill]

27. Good attitude there Stan. You should get a job at an Alzheimer's facility. You'd make a killing.

After all, God gave them Alzheimer's for a reason, and that reason was to make you rich.

Sadly, you are correct about not being able to stop people from being stupid with their money. However, we could pass laws restricting debt issuance, or requiring people to invest X% for retirement, or prohibiting them from withdrawing frivilously from their 401K's, but that would be nanny-statish, and I'm sure you oppose nanny-statism.

I guess you have to choose between a nanny-state where people are forced to save all their lives in exchange for a comfortable retirement, or one in which people are free to do whatever they want and tens of millions of seniors end up in poverty. I know given the choice, you would choose the latter, which is fortunate for you, because the result of your choice should start becoming obvious in the next 10 years.

But hey, what the hell, it's just more cheap retirement property for you. Supply-side Jesus says you're A-OK!

[gratuitous]

16. Don't privatized social security accounts sound scrumptious?

I mean, simply everyone is a financial whiz, and nobody would ever tap that money to cover debts they incurred by overspending their income. We'll all live like royalty in our golden years. Hell, they'll be platinum years!

The fact of the matter is that we all live fairly precarious lives, economically speaking. Mandated accounts that everyone contributes to and that is completely out of reach provide a safety net for all of us, and a lifeline for the neediest. Social Security isn't a lucrative retirement program, but it saves thousands, if not millions from penury, and is the most successful government program ever.

Look long and hard at the charlatans who want to dismantle it, and ask if any proposed "fix" is going to be anywhere near as successful. And what are we going to do about the folks who gamble and lose? Or the folks who are flim-flammed out of their savings at the last moment? Is it "tough luck" and out on the street?

[GOPNotForMe]

18. Took the words right out of my mouth.

And better than they would have looked had I said it anyway! There is an entire class of businesses out there that has a very specific and vested interest in doing everything possible to screw people out of their money. Pay day loans, universal default, sub-prime loans, these new 401(k) DEBIT CARDS (a new low). MANY people just aren't that smart or guarded with their money and it's not even really their fault. They're just bad with money. So thank GOD Social Security exists to prevent the aged and retired from living on the streets! Unfortunately, Social Security is becoming not enough to live off of as it is, so the people who aren't saving or putting anything away from retirement are in for a rude awakening soon. Question is, what do we do about them?

[Voltaire99]

19. He had "little choice." Oh. OK, then.

...he had little choice because he and his wife could not keep up with monthly expenses after American Express reduced the limits on three credit cards.

See? It's not his fault for being a spending pig who likes diamonds and BMWs.

It's Amex's fault for reducing the spending pig's limits.

He has no choice.

He's just livin' that Murrican dreeeeeeeeeeeeeem.

Oink oink oink oink!

[bemildred]

22. "may have to rely on an overburdened Social Security system"

What the heck do these morons think SSI is for? To buy luxuries with?
:puke::puke::puke:

[SoCalDem]

23. probably no biggie.. a 40 yr old with only 20K?? that's not much to start with

Lots of financial pain these days..

[slackmaster]

28. My net worth hit $0 at age 40

That's the year I got divorced.

[abelenkpe]

43. I had a little over 20,000 at 32 in 2000

and that's about what I have now. My 401k took a big dive after 2000, worked its way back up and is now headed down once again. My employer stopped matching and reduced our health benefits. I stopped contributing for a few years as well.

I have no mortgage. but I do have daycare and student loans, so while I make a great salary I am still only just getting by. So yeah, you are right, there's gonna be a lot of financial pain in the future. I guess I'll be slaving away until the bitter end, huh?

Rats....now I need some chocolate.

[AnneD]

25. That is so stupid...

and so scary. And the Gov. wants to do away with SS? :wtf: God what a recipe for disaster!

[sarcasmo]

31. Kick, and Rec. This is the next shell game to crumble.

Don't be the last one in line to draw money from your 401K.

[customerserviceguy]

49. I'm waiting for the day

when the government says, "You cannot have both Social Security and a 401K, line up here to choose which one you want." Millions will turn in 401K balances, I'd like to have mine offshore and hidden by that time...

[Wcross]

33. Bummer dude.

The Charlton family has signed themselves up for a working "retirement". Now we know where Wal-Mart greeters come from. They have nobody to blame but themselves.

Where does the media find these people who are willing to discuss how ignorant they are?

[kineneb]

34. we had to close out the 401(k) to get healthcare

We had to get rid of any cash assets to qualify for his gov. (low income) care before he got on disability. We never were able to save up, because he went through several long periods of unemployment and we had to live off of something.

[Lydia Leftcoast]

37. And I know people who had to tap out their 401ks because

they lost their jobs in middle age and couldn't find anything but part-time low=paying jobs and temporary jobs after that. Then their car needed repairs. Then they had a tooth get so infected that they were in constant pain. And so on and so on.

Not everyone who dips into their 401k was out buying BMWs and diamond rings.

[HockeyMom]

40. Out of work for over a year

My husband (age 50) was out of work for that amount of time. When his unemployment ran out and we had gone through all our savings, he got a job driving a limo which paid about $350 a week, which was down from a $90,000 a year job. We could not feed a family of 4, pay all the bills, and the mortgage on that amount of money, so yes, we tapped into the 401K until he found another job paying near ($75,000) the one he was making.

[khaos]

39. he should have withdrew it all.. 401Ks are junk

[Wcross]

41. Junk?

I will enjoy retirement a little better because of that "junk".

[khaos]

42. you hope you will.. keep your eye on the value of the dollar

[Art_from_Ark]

45. "Keep your eye on the value of the dollar"

Ain't that the truth.

I remember a TV ad for US Savings Bonds from the late 60s or early 70s-- it featured a mail carrier who was thrilled to report that "last year, with the US Savings Bonds payroll deduction plan, I was able to save 300 bucks!"

[Wcross]

46. I will be better off than those that save nothing.

I am also invested in a gold fund right now that is doing quite well. While I understand it is not "making" any money, it is keeping pace with the dollars loss of value.

[khaos]

48. good call on the gold

[abelenkpe]

44. this is what I am afraid of....

Why do I have to give my money to strangers so they can gamble with my savings in order to retire one day?

what happened to pensions? A 401k does not make me feel secure. The entire system needs to be changed so that people can have a decent and dignified life after slaving away all their healthy years.