Digging Deep to Save Your Digs!!
Margaret Collins from the San Francisco Chronicle writes about an unfortunate trend involving retirement accounts. Early distributions from 401(k) accounts hit a 10 year high in the second quarter of 2010. The primary reason for the early withdrawals involved the prevention of foreclosure and eviction. What this means to me is that people are busting there way through their retirement savings in an attempt to save their home. The problem is, is that this money will run out. People with bigger homes may have more money in their accounts, but their accounts will eventually run dry. This is proven out by the fact that in January of 2009 the percentage of foreclosures on mortgages of $1M or more was just over 6%. The same stat in June of 2010 was just over 13%. This problem is indicative of problems to come.
401(k) loans hit 10-year high in second quarter
Margaret Collins, Bloomberg News
The number of people borrowing from their retirement-savings plans reached a 10-year high in the second quarter, according to Fidelity Investments, as Americans grappled with slowing economic growth.
The portion of 401(k) accounts with loans outstanding rose to 22 percent by the end of June from 20 percent a year earlier, the Boston asset manager said in a study released Friday. The number of people taking withdrawals for financial hardship increased to 2.2 percent from 2 percent a year earlier.
“The current economy has really resulted in the need for some individuals to borrow from their 401(k) or take a distribution to pay for some critical living expenses, which puts their retirement savings in jeopardy,” Beth McHugh, Fidelity’s vice president of market insights, said Friday.
The top reason for withdrawing money was to prevent foreclosure or eviction, she said. A record 269,962 U.S. homes were seized in the second quarter, according to Irvine’s RealtyTrac Inc., as economic growth slowed to a 2.4 percent annual rate. Unemployment declined to 9.5 percent in June from a 26-year high of 10.1 percent in October, according to the Labor Department.
Depending on the rules of an employer’s 401(k) plan, individuals can take a hardship withdrawal that doesn’t have to be repaid if they demonstrate a financial need such as medical expenses or the purchase of a primary residence.
“That money is gone,” McHugh said. The distribution is taxed as ordinary income and participants may incur a 10 percent penalty if they are under the age of 59 and a half.
Workers also may borrow from their account and pay the loan back. The average initial loan was $8,650 as of June 30, with a payment period of three and a half years, said Fidelity, which has 11 million 401(k) participants in 17,000 employer plans, making it the biggest provider of the savings accounts.
Participants also cited the need to pay for college and the purchase of a primary residence as reasons for withdrawing money, the firm said. The average 401(k) balance at the end of the second quarter was $61,800, down 7.6 percent from the prior quarter, according to Fidelity. Workers’ annual contributions to their retirement accounts remained at about 8 percent of salaries, the firm said.
The findings are based on a study of plans offered by Fidelity, which oversaw investment assets of $1.4 trillion including retirement accounts as of June 30.
Read more: http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2010/08/20/MNU41F0TK4.DTL#ixzz0ymZzkOsl