Reuters reports on the recent rise in hardship loans at Fidelity Investments as an increasing number of workers take money out of their retirement savings instead of putting money in during their peak earning years in a weak (and getting weaker) economy.
A record number of U.S. workers are tapping into their retirement accounts to make it through the economic downturn, Fidelity Investments found in a survey released on Friday.
Among the 11 million workers whose 401(k) plans are run by Fidelity, 11 percent took out a loan from their plan during the 12 months ended June 30, the company said, up from 9 percent at the same point a year earlier.
By the end of the second quarter, plan participants with loans outstanding against their 401(k) accounts had reached 22 percent versus 20 percent a year earlier.
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Loans and withdrawals were highest among workers between 35 to 55 years old, Fidelity found, peak earnings years.Fidelity, the Boston mutual fund giant, is also the country’s largest administrator of retirement savings plans like 401(k)s, making its quarterly survey a closely watched barometer of saver behavior.
As more companies end traditional “defined benefit” plans like pensions, workers are relying more on “defined contribution” plans like 401(k)s to carry them through retirement.
How well these “defined contribution” plans carry workers through retirement remains to be seen. So far, based on the relatively low number of six figure 401k balances, expectations shouldn’t be too high. The fact that 401k holders have to manage their own money – investment choices, withdrawal rates, etc. – makes the chances of success even slimmer.
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Peak earning years? Those days are gone forever. Over a long time ago. Saving money is just a pipe dream for most folks.
When I took out a 401K to buy a truck I did not realize you pay the loan back with taxed dollars which will then be taxed again when you pull your money out in retirement.
If your out of work and need money it is better to just take your money out as a 72T plan. If you have a low enough income the 72T lets you get your pre-tax money back both penalty and tax free!!!!!!!!!!!!
I’ll second the 72T recommendation – steady and equal withdrawals over at least a five year period is all you have to do to avoid the penalty and, if things turn around, you can always put that money back in to a new retirement plan or into a health savings account.
Good information to have. I’ve two years expenses in a “layoff fund” and haven’t had to touch it — yet. Tapping a 401K would be my last resort. I figure even working miminum wage, I can stretch the layoff fund to age 62… Not a great plan, but a plan.