Leakage

Tom Parks, AIF®, CRPS®

Director of Retirement Plan Services, Annex Wealth Management

The other day a headline on the Wall Street Journal website entitled, “The Rising Perils of 401(k) Leakage” caught my eye so I decided to read further to see what they had to say.

The author discussed the steady stream of retirement savings that leave plans on an annual basis for expenditures that are not related to retirement.  They quoted former Super Bowl champ and mortgage company CEO Casey Crawford who said about his employees quote, “We want them to stop looking at their 401(k) like a cash register.”  Amen to that!

I always tell our clients that a 401(k) is an account with a singular, specific purpose: funding your retirement.

Economists at Boston College’s Center for Retirement Research estimate that 401(k) loans and other early withdrawal activity threatens to reduce retirement account values by up to 25% when compounded over 30 years.

You might be saying, “But Tom, I really need the money.”  My response could be, “Yeah, well you’re really going to need it when you retire, too” but I understand that wouldn’t be a particularly helpful sentiment.  So I did some homework to find out what people are paying for with the money they borrow from their 401(k) plans.

According to the Transamerica Center for Retirement Studies, about 23% of 401(k) loans are used to pay off debt.  Ok, that’s not necessarily the worst idea provided you’re not going to rack up a bunch more debt as soon as it’s paid off.

Tied for 1st place at 23% are “unplanned major expenses” such as home or car repairs.  This is why financial advisors always stress the importance of having an emergency fund.  You don’t want to rob your retirement to pay for current expenses if it can be avoided.

Coming in 2nd at 11% was the purchase of a vehicle.  Tied for 3rd place at 8% were home improvements and medical bills.  I would argue that medical bills are a necessity but new cars and home improvements are not.

I get that making ends meet isn’t easy but it is critical that we think hard about being prepared for the future because there are just as likely to be these unexpected expenses, medical bills, etc. when we are retired.  If we borrow from our future selves to pay for that stuff now, where are we going to get the money when we face these same challenges in retirement?

Apparently a lot of people have an answer for that one, too.  According to Prudential, over 1/3 of Americans aren’t even convinced that they’ll make it to retirement at all.  So the logic goes something like this, “Why bother saving for an event that isn’t even likely to happen in the first place?”

But retirement is happening – at a rate of about 10,000 people a day.  It is prudent to consider it a reality that you should spend some time considering and planning for.

It reminds me of a story about a woman who visits a fortuneteller who tells her, “Prepare yourself to be a widow. Your husband will die a violent and horrible death this year.”

Visibly shaken, the woman takes a few deep breaths, steadies her voice and asks, “Will I be acquitted?”

Now there’s someone who has spent time seriously thinking about her future! It’s time you did the same with your savings.

Kudos to those of you who are saving for your future. Keep it up. When the temptation comes to access those funds for purposes other than retirement, do all you can to figure out another way to cover those expenses.