Article re: taking money out of retirement account

[Deleted]

taking money from 401Ks before retirement:
business.time.com/2013/01/23/cash-leaking-out-of-401k-plans-at-alarming-rate/?hpt=hp_c2

Here is a nice highlight-
·  75% of those who cash-out their entire balance do so because of basic money management problems.

[Deleted]

And for those with basic money management problems, taking money out of a 401k is yet another bad money decision.

This is a really interesting way to look at it. I hadn't thought about the mass of 401k plans and how much percentage-wise is being removed. I like the image of "leakage," since it's something that's not supposed to happen.

[Deleted]

Here's the conclusion:

All this raises even more questions about 401(k) plans, which in many ways have failed Americans as a primary retirement savings vehicle. If so much money earmarked for retirement is going to be pulled out early, 401(k) plans would seem to be a terribly inefficient tool. The high costs of leakage point up the value of building and maintaining an emergency fund even before building a nest egg.

***

Yes, emergency funds are important.

Beyond that, what would be people's recommendations for a system to replace employer sponsored 401ks? Are you thinking government run? Privatized social security-style? Or just the ability to put up to the limit in a private IRA each year and that amount of income would be exempt?

[Pom]

Jan 23, 2013 16:26:55 GMT -5 RockNVoll said:

IMO it's not that 401(k)s are an inefficient tool, it's that Americans make poor financial decisions. This, in turn, is often driven by a lack of financial education. Sure there are some people who really do have unforeseen issues arise and have to do what they have to do. But I think more often than not people don't live within their means, understand the penalties and lost earnings that result from early withdrawals, or a combination of the two.

Winner, winner, chicken dinner.

[SusanBAnthony]

I would prefer to see a required contribution level, like 6% of your income maybe, and each company can choose what they offer as investment options, and each employee can pick from those. But, the contribution is required and cannot be taken out until a certain age.

But that will never happen.

[kadams767]

Jan 23, 2013 16:34:58 GMT -5 SusanBAnthony said:

I would prefer to see a required contribution level, like 6% of your income maybe, and each company can choose what they offer as investment options, and each employee can pick from those. But, the contribution is required and cannot be taken out until a certain age.

But that will never happen.

No, I think Americans would have a major shitfit if there was yet another person/entity telling them what they "have" to do with their money.  A tax increase would be nothing compared to the uproar that mandatory retirement savings would cause.   

[sillygoosegirl]

I don't think taking money out of retirement is necessarily a bad thing. Knowing that I can has always made saving for retirement an easy decision for me. When I was fresh out of college, I wanted to buy a house more than anything, so I didn't open a retirement account right away, preferring to save for what seemed like the more immediate need of buying a house. It was only after I learned that I could pull a large chunk of retirement money out without penalty for a down payment that I decided to save for retirement also. I wasn't sure how much I would need for the house vs retirement, so I just put as much in my retirement accounts as possible, knowing I could convert it back later as needed. As it turns out, it took us way longer to choose a house than expected (like 7 years longer), and we didn't touch our retirement accounts to do so. But even if we had, I think we would have been way better off taking some money out of retirement for the house than not saving much for retirement in the first place out of fear of not having enough money for short term goals.

[SusanBAnthony]

Fine, instead I will say that I think all jobs should just offer pensions again, since americans are morons who can't save for themselves. But since that isn't going to magically happen....

I didn't say what I thought would be popular or actually ever be passed.

[Deleted]

I think it's an inefficient tool because it doesn't take human nature into account. Most people don't have the discipline to make it work.

If my mother knew how much I am putting into retirement instead of, say, a bigger mortgage payment, she would be appalled.

[thatgirl2478]

Jan 23, 2013 21:39:43 GMT -5 spearmintleaf said:

I think it's an inefficient tool because it doesn't take human nature into account. Most people don't have the discipline to make it work.

If my mother knew how much I am putting into retirement instead of, say, a bigger mortgage payment, she would be appalled.

I think this is mostly because of the 'old' way of thinking - that SS will be there for you and will provide a nice-ish (at least liveable) lifestyle.  Most people in their 20s/30s/40s are pretty certain that SS WON'T be around and that they should save now so they can eat later.

Of course, I think the problem isn't so much lacking discipline not to spend the 401k, but having the discipline not to spend all the rest of their money NOW NOW NOW.  It's a spending problem and an immediate gratification problem.

[genet313]

Jan 23, 2013 16:20:02 GMT -5 RockNVoll said:

"One in four American workers with a 401(k) or other defined contribution plan to tap their retirement account for current expenses, a new study shows. This so-called “leakage” reached $70 billion in 2010, equal to nearly a quarter of all contributions that year."

Wow.

Does it break out people who take out the 10% (or whatever it is) for a home purchase?  Or is that not accounted for in this?