By Katie Moore
Recently, an article in Bloomberg News discussed how more people are tapping into their retirement accounts to make ends meet. At GreenPath, we encounter more people asking about the ramifications of using money that has been set aside for the future.
Unfortunately, we see situations where clients consider using their retirement savings to resolve their financial concerns, particularly since the downturn in the housing market eliminated the use of home equity as an option.
For someone, who may be decades away from retirement, using a 401(k) might seem like a logical solution to get through a tough time, despite knowing there will be long-term negative effects.
According to the article, “Younger workers ages 20 to 39 have the highest cash-out rates, with about 40 percent taking money with them when they switch jobs, according to data from Fidelity, the largest administrator of 401(k) plans.”
Although borrowing from retirement can be an effective way to catch up on past due priority bills, such as a mortgage in foreclosure or high interest credit card debt, it really should be used as a last resort and only if it will fix the root issue that caused the financial trouble in the first place. And in many instances, there are penalties for early withdrawal.
“The Internal Revenue Service collected $5.7 billion in 2011 from penalties, meaning that Americans took out about $57 billion from retirement funds before they were supposed to,” said the article.
Regardless of your age or economic status, before tapping into retirement savings, it is important to create a realistic budget to determine if it balances or will balance with the use of retirement funds.
If the root issue is that you simply do not have enough coming in to cover what needs to go out each month, there may be lifestyle changes to consider that will resolve the root issue and leave your retirement savings intact.