Angry Bear has carried posts on this issue over the years. 1. 2008 and draining the 401k pool of money, 2. Draining 401ks, 3. 401k and Social Security, 4.. Kenneth Thomas and retirements money (Links), 5. A 1000/mo pension equals 300,000 in savings among others.
Yves Smith at Naked Capitalism makes an impassioned statement. (Re-posted with permission)
Americans Raid 401(k)s, Replacing Home Equity Withdrawals as Way to Make Ends Meet
It’s been creepy to see economists and the financial media cheering the re-levering by American households as a sign that they economy is on the mend and consumers are regaining their will to shop. But ordinary Americans took huge balance sheet hits in the crisis: the loss of home equity, which only in some markets has come all the way back; job losses and pay and hours reductions, which led many to run down savings as they readjusted; declines in stock market portfolios; lower income thanks to ZIRP for retirees and other income-oriented investors.
While the top wealthy are borrowing, in contrast to the behavior of the rich predecessors, on the other end of the spectrum, many are still struggling for survival. The latest job report showed that the number of long-term unemployed, reflected in the level of people who’ve given up looking for work and are counted as no longer in the workforce, only continues to rise. Food stamps and extended unemployment benefits have been cut. And with soup kitchens under stress too, one wonders how people who are in such dire financial straits manage to get by.
Before the crisis, if someone was hit with a financial emergency, like an accident or sudden job loss, those who had houses could often draw on home equity. With that piggybank depleted or non-existent, the last-ditch financial fallback is accessing retirement savings.
Now admittedly, this does not necessarily take the form of partial or full liquidation of a 401 (k). Some plans allow for borrowing against 401 (k) assets, but it’s no free lunch. Borrowing is limited to a maximum of half of plan assets or $50,000, whichever is lower. While the borrowing is interest free, the funds need to be repaid in five years. If someone is already under economic stress, what do you think the odds are that he will be able to repay the loan, particularly since it comes out of after-tax dollars?
