More Americans dipping into retirement accounts to get by

nest egg

According to a new report, too many Americans are robbing their retirement nest eggs to pay the bills. Image: RambergMediaImages/Flickr/CC BY-SA

A new study says that more than a quarter of Americans with 401(k)s and other retirement accounts are dipping into those accounts before retirement to make ends meet.

More raiding retirement accounts than ever before

According to a new study from the financial advisory firm HelloWallet, more than $70 billion is drawn out of retirement accounts each year in cash or loans to pay for non-retirement needs. People in their 40s are the worst violators, with nearly a third raiding their retirement accounts for daily expenses.

The Financial services firm Vanguard also reports that the number of people taking loans or drawing funds from their retirement accounts has increased by 12 percent since 2008.

AARP says that people over 50 today carry higher balances on their credit cards than do younger consumers. The average U.S. consumer over 50 owed around $8,278 on credit cards last year. The average person under 50, however, owed just $6,258. That could make borrowing on their retirement accounts more tempting for those approaching retirement.

A disturbing trend

Financial advisers are disturbed by the trend. Personal finance guru Suze Ormand summed the problem up neatly. “If they cannot pay their bills while they have a paycheck coming in, how do they think they’re going to pay those exact same bills later on in life when they no longer have a paycheck coming in?” She added, however, that “It makes no sense in any circumstance to take a loan from a 401(k).”

Diane Oakley, executive director of the National Institute on Retirement Security, warned, “The savings in individual retirement savings accounts like 401(k) plans — which already are severely underfunded — continue to leak out at a high rate.”

In addition to diminishing funds intended for retirement, early withdrawals often come with additional taxes and penalties, not to mention lost interest, reducing its value right out of the gate.

Some see few options

Still, some consumers see themselves with few other options. One such consumer is Amy Shankland, who told NBC that she and her husband were forced to raid their IRAs when he was laid off, leaving them with credit card and medical debt, as well as two sons to raise.

“We didn’t know what to do,” she said. “It was either bankruptcy or cash in our IRAs.”

Eight years of salary

About a third of U.S. households contribute to 401(k)s or other kinds of retirement savings accounts, amounting to about $3.5 trillion all told. Experts recommend that consumers save at least eight years worth of their salary before retirement.


Boston Globe

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