Financial planners alarmed as people tap retirement savings to pay bills now
| Saturday, Mar 13 2010 12:00 PM
Last Updated Saturday, Mar 13 2010 12:00 PM
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Melissa and Brent Andrews withdrew from their 401 (k) to finance invitro fertilization that produced their son Iain (cq).
Two years ago, when Brent Andrews and his wife learned they wouldn't be able to conceive without fertility treatment, they raided their retirement savings to finance invitro fertilization.
It worked. Andrews is now the proud father of a 4-month-old son, but he and his wife aren't as well prepared for their golden years.
"We explored other options, but that was the only way we could come up with the money," said Andrews, 38, of Oildale. "I don't regret it. That was about the time the economy was tanking, so we would have lost it, anyway. And we had so many medical bills, we were able to write off some of the tax hit."
More and more Americans are tapping savings for the future to pay bills today.
Premature withdrawals from retirement funds rose 26 percent between 2005 and 2007, the latest year for which the Internal Revenue Service has statistics.
Financial planners and advocates for seniors are horrified.
"It's really a big concern to us when people make quick decisions like that, because those ultimately put your financial future at risk," said Charee Gillins, spokeswoman for AARP California.
"We definitely see our members making lifestyle changes in response to the economy. They're leaving retirement to return to work and delaying retirement, or they've stopped contributing to their 401(k)."
In Kern County, 31 percent of adults age 55 and older are employed, according to the U.S. Census Bureau.
That includes 21 percent of people ages 65 to 74 and 5 percent of those age 75 and older.
Many of the county's seniors not only have to feed themselves, but grown children who've returned home because they've lost jobs, said Lito Morillo, program director for the Kern County Aging and Adult Services Department.
Few are in a position to support a family again, and most would prefer not to work so late in life but have no choice, Morillo said.
Prematurely raiding retirement funds "has been an issue for many, many years, but it's really come to a head as a result of the economic downturn," said Tom Webb, a financial planner with Axa Advisors in Bakersfield.
Kern County recorded 17.1 percent unemployment in January, the highest rate in 16 years.
Meanwhile, Americans have $876.1 billion in outstanding credit card debt, according to the Federal Reserve.
That figure has been shrinking, but not because borrowers are paying off their balances, according to a recent study by CardHub.com, a Web site that helps consumers shop for the best credit card rates.
"We found that $83 billion of the $93 billion decrease in credit card debt from 2008 to 2009 was attributable to bad debt being written off the books," said the Web site's founder, Odysseas Papadimitriou. "Consumers are either unemployed or underemployed, and banks have been hiking their interest rates so that the payments they do make are going to interest, not principle. They can't get ahead."
At the same time, people have watched their home equity vanish in a real estate meltdown, and their stock portfolios have yet to bounce back to pre-recession levels.
That makes the nest egg awfully tempting.
Clients broach the topic often, said Jeffrey Bell, financial advisor with the Bakersfield office of Edward Jones, but he quickly talks them out of it.
Early withdrawal subjects savers to a double tax whammy. Those who take out money before the age of 59 1/2 generally must pay state and federal taxes on the amount withdrawn, plus an additional penalty tax.
The government took in about $1.35 million in such taxes in 2007, $1.2 million in 2006 and $973,000 in 2005.
"That's many multiples above the interest rate on the debt that you're looking to pay down," Bell said.
And, of course, it robs the saver's future not only of the withdrawal, itself, but of the profits the fund would have earned had it been left intact.
Compound interest pays interest on a saver's principal investment as well as on previously earned interest. So over 30 years, a $10,000 investment at 12 percent annual interest would be worth $299,599.22.
People who tap their nest eggs to pay off debt frequently wind up in trouble again a few years later, anyway, because they still have the same bad habits that got them into debt in the first place, said Axa Advisors' Webb. Next time around, there's no Individual Retirement Account or 401(k) to bail them out.
For that reason, Webb doesn't even like investors borrowing from their retirement funds.
"Too many people borrow the money, rack up even more debt and then default on the loan," he said. "I've seen it time and time again."
It's far superior to try to pay off debt out of a checking or savings account, said Larry Menna, president of the Bakersfield office of Raymond James Financial Services.
"It's a long, painful road, but even bankruptcy is better than wiping out your retirement, because if you don't change and start living within your means, eventually you're headed there, anyway.
"At least if you declare bankruptcy, you come out with a retirement account. They don't take that away."
There are less drastic ways to stop the bleeding, said Bill Hardekopf, founder of LowCards.com, a Web site that helps consumers shop for the best credit card rates.
"Call up your issuer and see if you can negotiate a lower interest rate," he said. "That used to be a lot easier than it is these days, but that doesn't mean there is no way you can find some grace or relief. If you can't get anywhere with the first person, politely ask to speak to a supervisor. Especially if you're a long-time customer in good standing, sometimes they'll work with you."
