As life’s priorities increase, more people (especially millennials) are looking for ways to generate income. One trend that is unfortunately materializing is the process of tapping into their retirement savings. Typical reasons for this can include paying for college or medical expenses, but a new home purchase is way up there on the list.
According to a Scarborough Capital Management survey of adults who have 401(k) accounts, about 12% of people ages 18 to 34 have pulled money out of their 401(k) accounts to buy their first home, and of those 35 to 44, about 7.7% have done so. The percentage decreases further for older adults.
This process obviously takes away from your retirement income, along with the potential addition of penalties for early withdrawal. One way to offset this hit to your retirement is to try and pay yourself back by taking out a loan. And while a loan repayment can get you back on track for your retirement savings, there are things you must keep in mind that can still have a negative effect on your savings.
While loan repayments do carry an interest component which you essentially pay to yourself, the interest rate might be much lower than what you might have earned on your plan’s investments during a rising stock market, so you might not come out as ahead as you had hoped. Working with a smaller amount can also lead to a lower retirement balance resulting in a lower standard of living — or possibly necessitating that you work longer than you had anticipated. And old habits are hard to break: Once you start tapping into a 401(k) it makes it that much easier to hit your retirement funds for additional cash and it’s hard to stop.
Building and maintaining enough wealth to get you through retirement is an understandable concern and its’ one that you should be reviewing with your financial advisor. If you wish to learn more ways to build up your retirement savings, I invite you to visit our website at www.mooneylyons.com or call us at 847.382.2600 to talk to a Mooney Lyons Representative.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
References:Skinner, Lynn. Advisers should help millennials understand hazards of tapping 401(k) savings. Investment News. 26, Aug. 2016.