Leaving Something for a Rainy Day(s)

With a show of hands how many of you are confident you are saving enough in your 401(k) to fund your retirement?

Probably not nearly as many who should be.

Since its inception in 1978 the 401(k) plan has been the retirement staple for millions of Americans and currently about 94 percent of the employers in the U.S. offer such a plan with the total amount held 401(k)s across America being about $7 trillion.

However, a recent article in the Wall Street Journal chronicled a disturbing trend whereupon employees have been taking money out of the retirement plans – or via “leakage” as it is known in the financial services lexicon.

This “leakage” according to experts threatens to pare down the wealth currently held in retirement accounts by 25 percent – when those lost annual savings are compounded over a 30 year period according to economists at Boston College.

In 2014 alone, employees pulled some $68 billion out of their respective retirement plans.

Most plans allow the contributor to withdraw their savings—after taxes and penalties —for reasons including such things as a home purchase or medical expenses. To combat this, a number of companies including DIYer Home Depot are taking steps to better inform workers of the financial implications of borrowing from their retirement accounts or pulling the money out when they leave jobs including free consultations with financial counselors to help understand the implications of such actions.

Should a Home Depot employee tap their 401(k) for a loan, they must wait at least 90 days after full repayment before they’re allowed to withdraw additional funds. The company indicated that since the program’s inception, the number of outstanding 401(k) loans has declined roughly 17 percent.

In addition when applying for a 401(k) loan online, Home Depot employees automatically receive a pop-up notice that includes an estimate of how much the loan would reduce the employee’s savings by the time they’re ready to retire.

According to industry statistics about 30-40 percent of people leaving jobs elect to cash out their accounts and pay taxes and often penalties rather than leave the money or transfer it to another tax-advantaged retirement plan.

Some companies are  encouraging new employees to rollover their existing retirement savings from a former employer into their new 401(k) plans and some like Redner’s Markets, a grocery chain in the DelMarva corridor, are offering low-cost loans outside their retirement plan as an alternative.

In full disclosure, I’ve tapped into my retirement plan on two occasions, but eventually repaid any borrowings. I have this future vision of becoming pickle ball champ of my retirement community, not grilling squirrel under a bridge and living in an empty refrigerator box.