Your employer-sponsored retirement account was created for your benefit.
And yet, it seems like time and time again, we discover loopholes and inconsistencies that swindle you out of your maximum retirement savings.
Employers may not offer a contribution match, or they may not inform you about the ins and outs of your account.
All of these things hurt you, and your retirement savings, and it has to stop.
Let me tell you about the latest scam 401(k) holders will loop you into, and I’ll save you from imploding your retirement savings before it’s too late.
Participant loans allow people saving for retirement to borrow their own money from their 401(k).
Most every employer that offers a 401(k)-retirement investment account also allows their employees to take out this kind of loan.
They’ll convince you it’s the right course of action with promises like: “Pay interest to YOURSELF.”
A 4% return on a loan from money you’ve already paid does NOT compare to the returns that sum would be getting had it been properly invested in the stock market.
They’ll try to scare you, and say: “What if the stock market crashes? What if we hit a recession? Paying back your loan plus interest guarantees your retirement account still makes gains.”
But recent studies show that even on the low side of returns, the stock market will award 6-8% on your funds.
That’s double what interest pays, and the more money you invest for a longer period of time, the larger your retirement sum is.
If you don’t believe me yet, let me give you an example.
Say at 30 years old, you borrow $20,000 from your 401(k) to make a down payment on a house.
Over 35 years, you lose $4,075 if the stock market returns 6%, and you lose $15,000 if it returns 8%.
That’s assuming that you’re making the same contributions you were before you took out the loan AND repaying the loan plus interest.
Not to mention that if during the repayment period you stop making contributions altogether, you lose your employer match and cost your retirement fund $96,000 (minimum).
So, you’re probably wondering what I suggest you do, if you for some reason encounter a big expense.
Do NOT take from your 401(k).
It’s as simple as that. The system is broken, and it encourages you to utilize the funds that should be reserved for your well-being in retirement for other things.
Consider home-equity loans (they allow you to borrow based on the value of your home), health savings accounts, or separate emergency savings.
Your retirement investment account should NOT be marketed as a rainy-day fund, nor should it be connected to other expenses, besides the ones you’ll face in retirement.
The odds are already stacked against you in preparing to retire. The country as a whole is failing miserably to present savings capable of sustaining an entire retirement. You don’t want to become that statistic.
Now I know, this one’s going to require a bit of self-discipline here, but it’s for your own good.
They will make it as easy as pie to borrow funds from yourself through your 401(k), but you’re only hurting yourself in the end.
Taking a participant loan is risky, difficult to pay back, and damages your retirement savings irreversibly.
I would also feel better knowing you’re aware that the full participant loan balance becomes due immediately should your employment be terminated.
If you voluntarily choose to leave, or if you’re laid off, the entire remaining balance of the loan is due within 60 days.
Virtually no one in this situation pays it off, and you have to swallow a 10% penalty fee and the realization that you’ve just lost all of it for your retirement.
Don’t be the next to default on a participant loan. It has become all too easy for retirement savers to unknowingly implode their already fragile funds, and I want YOU to be protected from it.