Tuesday, October 09, 2007

How to have this Crash get HUGE: 401k

Hattip to Sandman for this link.



From Sandman's link:
Despite potential tax and investment consequences, more individuals have been borrowing from their 401(k) plans or taking hardship withdrawals in recent months, some retirement-plan providers say.

Not all plans have seen jumps, and more-comprehensive statistics won't be available until next year.

In other words, J6P won't know about this until its blown up another part of the credit economy. Sigh...

Later in the article:
Most plans allow borrowers to take money out of their 401(k) accounts to pay tuition, purchase a residence, pay medical or funeral expenses, or to avoid eviction or foreclosure. Borrowers must repay the loan plus interest, which is typically set at one or two percentage points above the prime rate.

20% of Fidelity 401k customers have taken advantage of this... so basically we're going to see 10% to 30% of the 401k funds go "poof" due to this RE bubble.

This is going to be a really ugly recession.

Got popcorn?


Anonymous said...

And here I thought that the 401K was the nest egg for retirement exclusively, no other use, no withdrawals until retirement age, just let it grow tax deferred and leave it alone.

And so many experts claim:
A)Social Security should be privatized, the people can do a better job managing their own retirement money (just like the real estate "investors" did)
B)The stock market earns a better return than bonds or CDs (think house builders stock)
C)A good financial analyst will help out investors for the long haul (and how many analysts were feathering their own nests as pump n' dump artists, talked up dot coms until they became dot bombs, are now doing/did the same for real estate, made insider trading an art form, etc.)

"This is going to be a really ugly recession."
Why Neil, you sound much, much, much too optimistic.

Sorry for rambling on like that, it just bothers me that so many are going to get creamed when this whole mess plays out.

One more point to make if I may,

the cry "the baby boomers will save us" ignores the fact that not all baby boomers are going to retire rich. Many, if not most, ended up in middle class or lower middle class jobs, some ended up in lower class jobs barely making enough to earn a living. This will not be enough to revive the housing market, let alone revive the economy.
I fear many boomers will keep working not because they want a job to keep busy, but they need to because they can't afford to retire on either no retirement savings or savings too meager to sustain them for 20 years or more.
It is for those who will be forced to keep working beyond 65 that I feel really bad for.

sandman said...


Thanks for the front page. I have a different perspective on this one I'd like to run past everybody.

Borrowing from the 401k is just like getting a new credit card, or being "fortunate" enough to get a HELOC - today, it just delays the inevitable. I don't see it making the current recession any worse, it'll just make it occur later.

The difference is that it guarantees VERY bad things in the future, i.e. retirees with no money, who'll need a govt. bailout. If the trend takes hold, we're looking at problems for the next 40+ years. This is the kind of news that truly scares me. I wonder if people in the future will speak of "retirement" the way we speak of "pensions" today.


Rosalie said...

neil and all,

Wow....I have been amazed ever since I started following this blog. I am 22 and my husband is 26 and we have been saving now for a year. I am proud to say I am completely debt free! and just anxiously waiting. I am looking to buy in riverside county. My husband wants an acre horse property. I am a licensed agent (DONT WORK IN THE INDUSTRY AT ALL)it's not like I would have work right now anyway..I have a great accounting job. it's amazing the way houses appraised. houses built in 2001 with acre+ sold for under 220k in 2002. then skyrocketed to 500k+ in 2005. do you guys think it's unrealistic for me to wait around and see those same comparable properties back in at least a range of 280k-330k??? and although i believe numbers and history does not lie, I believe we should be getting to those norms. at least in Riverside, San Bernardino county. Can I get an opinion?

Justin said...


I do Not think it is unrealistic for you to wait to see prices drop downto 330K or less, especially if the current owners of these properties bought at 220K and are eager to sell for a profit. (i. e. get while the gettin' is good)
If you can find any REO or bank owned properties that might be the way to go for an even better price.

As to when we hit bottom in this real estate mess, it is harder to predict a bottom than it is a top. Wait & save for another year (or two) and take your time choosing the property you want.
don't be afraid to say NO! to any house for any reason.

Just remember that you will not only have to make payments for the house, but you will have to spend much of your time in the house, buying a house in need of repairs or is drafty or too close to the major roads is not worth the purchase price, especially if you plan to live in the house for 5-10 years.
I widh you the best of luck in the future.

Your concerns over the 401K being raided like a piggy bank in the future are not only legitimate, that situation is happening now as we speak.

Personal experience:
My brother raided his 401K to pay off credt card debt, pay back student loans, used it as money to live on while unemployed, etc. When my brother reaches 65 he is going to have to keep working well past his retirement age, as will many who have the 'live for today' mentality.
No one forced them to raid their 401K any more than anyone forced them to buy a house or internet stock. The spendthrifts are going to be facing a mighty bleak retirement instead of a golden one. They ingored the advice, lifestyle and behavior of their parents and grandparents, save for tomorrow, spend less than you earn, avoid debt you cannot pay back, you can live without the $100 pair of sneakers, etc.

Sadly, people often act before thinking and don't bother to think at all when it comes to money or retirement plans.

Rosalie said...

Thanks for the advice Justin...

will do and will be hanging in tight after all I have nothing to lose...have been staying with my parents rent free to be able to save the most cash possible.

Thanks again!!!!!!

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