DLS Consulting

Don't Touch That 401(k)

Word out of many custodians of pension and retirement funds is showing that people are tapping into their 401(k)'s and other retirement accounts during this time of economic duress. This should not surprise us since Americans have been avoiding the boredom of normal savings practices to provide liquid funds during periods like this, and the retirement accounts are the last source of liquid funds. The effect of this is to produce a double whammy of negative impact since the assets being liquidated inside the 401(k) are being sold often at the very worst time and therefore are incurring significant losses.

Rather than taking distribution and incurring taxes, many people are "borrowing" the funds from their account and bringing even more debt into their life as they essentially must then pay themselves back in order to have funds for retirement. Those paybacks will in all likelihood not be returned to the 401(k) in time to benefit from the market recovery so the double whammy is that they will have sold out at the bottom, never benefited from the recovery, and still owe themselves the funds in the future.

Years ago, when companies had traditional pension plans, or as they are called defined benefit plans, employees could not have stolen (borrowed) from their pension plan even if they wanted to. An outcome of the movement to 401(k)'s or defined contribution plans is that they are voluntary, liquid, and self directed. Maybe this is one time the good old days really were the good old days. If anyone asks you, tell them to NOT pull money out of their retirement plans unless it is to use for retirement!

Proverbs 13: 11-13 "Dishonest money dwindles away, but he who gathers money little by little makes it grow. Hope deferred makes the heart sick, but a longing fulfilled is a tree of life. He who scorns instruction will pay for it, but he who respects a command is rewarded."

Monday Morning Message Sent 7/21/08


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