More than one out of four workers withdraw money from their 401(k) or other retirement savings to pay mortgages, credit cards and other current expenses, according to The Washington Post, citing a report from the financial advisory firm HelloWallet.
Out of the $293 billion going into the retirement accounts each year, about a fourth goes out through early withdrawals.
“We’re going from bad to worse,” Diane Oakley, executive director of the National Institute on Retirement Security, told The Post, noting that the retirement accounts are already underfunded and fewer workers have pensions.
Editor's Note: Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.
Vanguard, a major 401(k) manager, noted that withdrawals and loans from retirement accounts increased 12 percent since 2008.
Companies contributing to the accounts assuming they'll be used to fund employees' retirements may have reason to wonder.
“What you have is 401(k) participants voting with their wallets saying they would much rather use this money for other purposes. I don’t think this can be ignored. Employers are dramatically overpaying for retirement, but it is not benefitting the employee,” said Matt Fellowes, chief executive of HelloWallet, according to The Post.
“In many cases, the only one benefiting is the vendor.”
Withdrawals jumped during the recession, as more Americans faced financial hardships. In 2010, 28 percent of participants had loans against their retirement funds, the highest ever, according to Aon Hewitt data cited by The Post.
Workers withdrawing funds typically must pay income taxes as well as a 10 percent penalty. Taking loans from a 401(k) plan isn’t necessarily better, since workers miss out on growing funds in a tax-free environment and might not be able to pay the loans back, warns AARP.
More than 17 percent of workers last year defaulted on their 401(k) loans.
"We’re worried because we understand that this precarious retirement system leaves us vulnerable," Carole Fleck, senior editor for the AARP Bulletin and website, wrote in a blog. "And that’s true even when we don’t tap our retirement funds while we’re still working."
Editor's Note: Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.
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