Dire Implications for the +25% of American Workers Using Retirement Savings Accounts to Meet Current Expenses

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More than 25% of American workers (33% of those in their 40s) with 401(k) and other retirement savings accounts use them to pay current expenses, new data show, [which is] undermining already shaky retirement security for millions of Americans. With federal policymakers eyeing cuts to Social Security benefits and Medicare to rein in soaring federal deficits, and traditional pensions in a long decline, retirement savings experts say the drain from the accounts has dire implications for future retirees. Words: 890

So writes Michael A. Fletcher, THE WASHINGTON POST, in edited excerpts from his article* entitled 401k Withdrawals Ramp Up As Consumers Scratch For Cash.

This article is presented compliments of www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds) and www.munKNEE.com (Your Key to Making Money!) and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.

Fletcher goes on to say in further edited excerpts:

A report due out this week from the financial advisory firm HelloWallet found that found that lower-income people, who are the most frequent users of payday loans, pawnshops and other high-cost credit outlets, were found to be those most likely to cash out their retirement plans when they changed jobs.

Using data from the Federal Reserve’s Survey of Consumer Finances and the Survey of Income and Program Participation, conducted by the Census Bureau, the report said:

• 30% of households earning less than $50,000 a year
• 12% of households earning between $100,000 and $150,000 a year and
• 8% of those earning more than $150,000 a year

had cashed out a retirement plan for non-retirement purposes.

The most common way Americans tap their retirement funds is through loans, which must be repaid with interest. Those who withdraw money face hefty penalties. In most cases, they not only incur a 10% federal tax penalty but also pay income taxes. The costs are financially harmful to families even as ­money-management firms reap massive fees for handling retirement accounts that ultimately are not used for retirement. In addition, employers often are subsidizing the accounts with matching contributions on the assumption that the money is helping to secure their employees’ retirements….

Since 401(k)s were created by Congress in 1978, concern about the pervasive use of retirement funds for other expenses has grown as other means of retirement security have dwindled.

• In 1980 80% of private-sector workers were covered by traditional pensions that paid them a fixed benefit based on their salary and length of service once they retired.
• Now, just 20% of workers have a pension,

leaving 401(k)s and similar retirement savings accounts as the primary vehicles for retirees to supplement their Social Security benefits….

In 2010,

• 28% of participants reported having an outstanding loan against their retirement accounts, an all-time high, according to a survey of 110 large employers by Aon Hewitt, a human resources consultancy and
• nearly 7% of employees took hardship withdrawals that year (roughly a 40% increase since the recession),
• while 42% of workers cashed out their plans rather than rolling them over when they changed jobs….

Overall, about a third of American households participate in 401(k)-type accounts, which hold a combined $3.5 trillion in assets – but a large portion of that money does not make it to retirement. A recent study by Boston College’s Center for Retirement Research found that the typical household approaching retirement age has an average of $120,000 in retirement savings, enough for roughly a $7,000-a-year annuity….

In 2006, employers were given broader latitude to enroll employees in 401(k)-type plans unless workers asked not to participate. Just this year, the annual limit for 401(k)-type contributions increased from $17,000 to $17,500 for workers under age 50 and from $22,500 to $23,000 for those who are older. Meanwhile, the Saver’s Tax Credit provides up to $1,000 to help low-income workers build retirement savings.

Many employers have embraced 401(k) and other defined-contribution accounts as a way of helping workers save for retirement while relieving themselves of the financial risks that come with managing a traditional pension plan.

In theory, 401(k) accounts are better suited to an economy in which workers are changing jobs more frequently than ever because the accounts can be rolled over from previous employers but their success depends on workers consistently contributing to them and allowing the money to stay in place throughout their careers, allowing their investment returns to compound. Many workers — particularly some earning higher salaries — do just that but many others, who have precious little savings elsewhere, tap their retirement money as a sort of “rainy day” fund, eroding its power for the future.

Generally, workers are allowed to:

• tap their retirement accounts for loans up to $50,000, or half their account’s value, whichever is smaller,
• “cash out” the money when they change jobs or
• take “hardship” withdrawals, which often go to pay for housing, overdue bills or educational expenses.

The cash-outs and hardship withdrawals subject account holders to taxes on the money they put into the accounts, any investment gains, and if they are under 59.5 years old, a 10% tax penalty.

Experts warn that when workers draw on their retirement accounts to pay current bills, they put themselves at greater risk of descending into poverty upon retirement, which would leave them dependent on government programs such as subsidized housing or food stamps. Nearly 6 million senior citizens were living in or near poverty in 2010, according to a Senate committee, a number expected to increase sharply over the coming decade after a long period of decline.

The widespread breaching of retirement accounts has led some advocates to conclude that policy­makers and employers should expand their vision when thinking about their workers’ retirement needs….

The investment advice out there needs to recognize that a large share of participants is not going to use the money for retirement, so they should not be exposed to risky investments…

Editor’s Note: The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.

*http://www.streettalklive.com/off-the-street/1459-401k-withdrawals-ramp-up-as-consumers-scratch-for-cash.html

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