Credit Crunch
Forces Seniors
To Raid Retirement Savings!
Surviving today's lackluster
economy has some Americans diving into their retirement accounts. This continued
practice may produce the risk of shortening peoples retirement savings. But this
approach is helping to sustain day to day living. Remember
the old saying “Having to rob Saint Peter to pay Saint Paul”? That is
what some Americans are doing to combat the impact of the credit crunch. Retirement
plan administrators have seen a spike in hardship withdrawals and loan requests
from those struggling to make ends meet. The retirement
plans have their own definition of dire financial needs that allow consumers to
withdraw money out of their 401(k) to cover short term expenses. One of the drawbacks
of this practice is that the withdrawals are taxed. Not
only are taxes levied but a penalty of up to 10 percent is also subject to those
who are younger than 59 and one half years old. Other withdrawal practices are
that an investor is allowed to take a loan worth up to $50,000 or 50 percent of
their invested amount - whichever is less. However, the loan is considered a withdrawal
if the borrower defaults, therefore subject to the same tax penalties. Cutting
your 401(k) short, even for a limited time, is not the best course of action one
could take. You have to seriously consider the ramifications of delving into your
future income. While these loans or withdrawals may ease current financial burdens
of day to day living, looking at the long term affect must be taken into account.
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The
credit crunch impact on retirement savings calls for some plans not allowing contributions
to be continued while payments are being made on the loan. While others enforce
a set time period before an employee can begin to make contributions. Workers
take another hit when employers match contributions because essentially you are
paying yourself back. Therefore you will not earn as much when you take out a
loan because you are paying back after-tax dollars. With
retirement savings alarmingly low, withdrawals from a large 401(k) could deplete
accounts savings by tens of thousands of dollars. Almost half of Americans that
are between the ages of 36 and 43 run the risk of not having enough in their accounts
to sustain the style of living they enjoy now. However,
the impact the credit crunch has on retirement savings is a two fold dilemma.
One being that the savings are being used to ease the financial burden of today’s
economy and two, the reality of how to survive on limited resources is hitting
home with most people. In other words, contributors may begin rethink if they
are putting enough money into their retirement accounts to sustain a decent living
after they do retire. All in all the current credit
crunch may have a negative impact on your retirement savings. However, the younger
you are the more likely you will be able to build your 401(k) fund up to a more
acceptable level as you have a longer time before retirement age. Yet even with
age taken into account, there may be other avenues to explore before dipping into
your life savings.
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