4um: Dakmar's Semi-Serious Economic Rescue Plan

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Title: Dakmar's Semi-Serious Economic Rescue Plan
Source: cognac
URL Source: http://none
Published: Oct 10, 2008
Author: Dakmar
Post Date: 2008-10-10 18:54:39 by Dakmar
Keywords: None
Views: 1434
Comments: 38

Was sitting at working today stewing over my 401k losing enough overnight to buy a cheap new car, and enough in the past two weeks to buy a faster car (still new) than I have now. Started wondering if borrowing against said rapidly deflating account to pay off balance of mortgage might be feasible, at least I'd own home outright. I understand all the mainstream arguments for putting money into 401 and not borrowing from it, but the way things are going it looks like my retirement will consist of a raisin and any paperclips I might find. Anyway, borrowing against my 401 also entails paying it back, back into the same hands that lost me a V8 Mustang so very recently, only for them to gamble it away again.
Anyway, here's my proposal:
Allow workers bees to withdraw from their 401k account explicitly to pay off or down their mortgage. It will put liquidity into the hands of responsible lenders while investing in the American Dream of home ownership. No penalties shall apply, and the transfer shall be taxed at same rate taxpayer is currently paying. In other words, as long as this money is used to pay mortgage balance, it does not count as extra income for the year.
Please feel free to debate pros and cons of my idea, you cannot hurt my feelings.
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Begin Trace Mode for Comment # 21.
#1. To: Arete, Esso, Jethro Tull, christine, lodwick, Investors (#0)
An added benefit would be that the Federal Govt could collect all that tax-deferred 401 money in one lump sum right now.

Dakmar posted on 2008-10-10 18:57:49 ET Reply Untrace Trace Private Reply
#16. To: Dakmar (#1)
Dak, I personally think it's a grade A idea.
I found two articles, one pro and one con for your reference.

You can't afford your mortgage. you can't afford your car payments. time to dip into your 401(k)?(Business)
Article from: The Virginian Pilot
Article date: February 20, 2008
Byline: J.W. ELPHINSTONE
By J.W. Elphinstone
The 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 sport utility vehicles, pay mortgages or put food on the table.
However, 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 years old. That means that if the trend grows, many Americans will risk coming up short on retirement savings or might have to rely on an overburdened Social Security system.
"People who take out a loan or withdrawal are adding to a looming retirement crisis over the next 30 to 40 years," said Eric Levy, a partner at global consulting firm Mercer.
Some of the nation's largest retirement plan administrators, such as Great-West Retirement Services and Fidelity Investments, are seeing double-digit spikes in hardship withdrawals and increases in loan requests - a sharp departure from levels that traditionally varied little.
Administrators say consumers are using retirement savings to pay for unmanageable mortgages, maxed-out credit cards, even utilities and groceries.
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. He's looking for someone to take over his $550 monthly payment on a gray BMW 335i he leased last April.
Charlton said his goal is to pay off the 401(k) loan in two years. He has not decided whether to contribute to the plan during that time. "I made the best decision I could," he said. "I keep hearing about bankrupting your future retirement, but I feel like it's far enough away that I'll be able to save up enough."
Charlton's predicament arose as lenders are taking steps to rein in credit because more consumers are missing payments on mortgages, credit cards and loans. Borrowers are finding their credit limits suddenly reduced and low- interest cards hard to come by. Mortgage lenders also have reduced limits on home-equity lines of credit.
Meanwhile, jobs are harder to find, and consumers are getting pinched by higher food and fuel prices.
Consumers who tap their retirement accounts can take a loan from their 401(k) accounts worth up to $50,000, or 50 percent of the amount invested, whichever is less. There are no tax consequences for a loan in good standing. But if a borrower defaults, the loan is considered a withdrawal and subject to the same tax penalties.
If Charlton repays his loan and continues making contributions, his account balance at 62 will be nearly the same as if he had not borrowed, according to projections by Alicia Munnell, director of The Center for Retirement Research at Boston College.
But if he repays the loan and suspends contributions for five years, his final account balance would be 18 percent less.
Based on current savings rates, the center estimates that 43 percent of households risk not being able to fund the same standard of living during retirement as they have in their working years. That percentage increases to 49 percent for Americans between 36 and 43 whose main retirement plans are 401(k) accounts, not employer-funded pension plans that were more common for older generations.
Some 401(k) plans don't allow workers to make contributions while making payments on loans. Others require workers to wait a set time before contributing again after taking a withdrawal. If the employer matches contributions, workers are taking a double hit.
"The idea of paying yourself back is not necessarily a plus," said Charlie Nelson, a senior vice president at Great-West Retirement Services. "For a loan, you're paying back using after-tax dollars, so generally, over time, you won't earn as much."
Great-West, part of a Colorado-based insurance company that manages 3.5 million accounts for employers, said hardship withdrawals jumped 14 percent last year, and the number of loans rose almost 13 percent, with a dramatic increase in the fourth quarter.
"What we're talking about is people spending their retirement now and lowering their standard of living when they retire," said Stuart Ritter, a certified financial planner with T. Rowe Price.
"People aren't willing to make some of the tougher choices in the short term to make a better future for themselves."
In the past three decades, 401(k)s have replaced traditional pension plans as employers' preferred retirement offering, shifting the responsibility of saving to employees from employers. About one-third of workers ages 36 to 43 are covered by a traditional pension.
If Americans find they didn't save enough, they might have to work longer and shorten their "golden years" of retirement, Munnell said. Otherwise, workers will have to cut corners and settle for a frugal retirement.
Ritter worries that unaffordable mortgages or other financial troubles will persist for many consumers, even after they have tapped retirement funds.
But for Americans who are struggling to keep afloat in a slumping economy, today's money problems are more urgent than a retirement date.
Said Charlton: "We have to take care of ourselves now and put retirement on the back burner."

Jethro Tull posted on 2008-10-10 20:09:57 ET Reply Untrace Trace Private Reply
#18. To: All (#16)
Pay your mortgage with 401(k) money? Bad idea!
Article from:
Daily Breeze
Article date:
September 25, 2006
Author:
Steve Bucci BANKRATE.COM
More results for:
401 savings to pay down mortgage

Question: I have thought about taking $50,000 out of my 401(k) to pay off my second mortgage. My thought behind this is that I will be paying myself the interest rather than the bank. I have calculated what the payment would be and can afford this. Why does this sound too good to be true?
-- COREY
Answer: Not since my cousin Glenn turned down a job with Microsoft in the '70s to work for a local credit union for $500 more a year have I heard such a bad idea. It does sound too good to be true, because it is, especially if you consider losing upward of $100,000 in retirement savings a bad thing.
On the surface, borrowing from your 401(k) seems like a win-win situation: You don't have to qualify for the loan, the interest rate is good, you are paying interest back to yourself rather than to a lender, and by borrowing, rather than taking an early withdrawal, you avoid the 10-percent penalty.
Now, to avoid "Glenn's Folly" (sorry, cousin), let's look down the road and see what the future holds. The most damaging disadvantage of borrowing from your retirement plan is the loss in future growth of your retirement fund.
Borrowing dramatically affects your bottom line. For example, let's say you borrow $50,000 that you pay back in five years with 7- percent interest. Your 401(k) is earning 10 percent. You are eligible to retire in 20 years. Your fund will be short a net $110,673 at retirement due to the loan. Run the numbers yourself on Bankrate's "Should I borrow from my 401(k) plan" calculator.
If that's not bad enough, let's consider one of life's inevitable curveballs. If your job gets eliminated, your loan then becomes due in full and you are unable to repay the loan, then the loss increases to $431,404 because of taxes and penalties.
Whoa! That $50,000 loan seems a little more costly now, doesn't it?
Big disadvantages of borrowing from your 401(k) include:
* Repayment of the loan is with after-tax dollars, so you will end up paying taxes twice on the same money.
* On some plans, you might not be able to make contributions with an outstanding loan, which will hurt the bottom line even more.
* The interest is not tax-deductible.
* The entire balance of the loan must be repaid in 60 days if you leave your job voluntarily or involuntarily.
* You are robbing your retirement to pay for today's living expenses.
With all this said, borrowing from a 401(k) or other retirement account is better than taking an early withdrawal.
Corey, my advice to you is keep paying off that second mortgage with today's money and leave tomorrow's retirement money alone. You're going to need it.
The Debt Adviser, Steve Bucci, is the president of Money Management International Financial Education Foundation and the author of Credit Repair Kit for Dummies. Visit www. moneymanagement.org or call 877-311-2227 for additional debt advice.

Jethro Tull posted on 2008-10-10 20:12:14 ET Reply Untrace Trace Private Reply
#21. To: Jethro Tull (#18)
The most damaging disadvantage of borrowing from your retirement plan is the loss in future growth of your retirement fund.

bite me

Dakmar posted on 2008-10-10 20:22:10 ET Reply Untrace Trace Private Reply
Replies to Comment # 21.
#22. To: Dakmar (#21)
Suck my bullion bits.

Jethro Tull posted on 2008-10-10 20:43:18 ET Reply Untrace Trace Private Reply
End Trace Mode for Comment # 21.
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Pay your mortgage with 401(k) money? Bad idea!