Raiding the 401(k)
Wow, I found this shocking:
"Borrowing from retirement plans is surging.
At the end of last year, 18% of workers had loans outstanding from their plans, up from 11% in 2006, according to a survey of 2,011 full-time employees released in February by the Transamerica Center for Retirement Studies, a nonprofit corporation funded by Aegon NV's Transamerica Life Insurance Co.
With home prices falling nationwide, the loans may be a sign that cash-strapped consumers are raiding their nest eggs to stay afloat, no longer able to tap their houses for cash and up against their credit-card limits . . .
Last year, 52% of workers with annual incomes of $50,000 to $100,000 said they planned to rely primarily on 401(k) plans and IRAs to pay for living expenses in retirement, up from 46% in 2006, according to the Transamerica survey. The percentage counting on Social Security also increased, to 19% from 13%, while those counting on a company-funded pension plan dropped to 11% from 18%."
Sounds bullish to me . . .
>
Source:
Raiding the 401(k) Nest Egg
JENNIFER LEVITZ
WSJ, May 5, 2008; Page R1
http://online.wsj.com/article/SB120994246231866045.html
Monday, May 05, 2008 | 05:30 PM | Permalink
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Normal people unlike the government can't just print money. The government, however, can just print money and send it to them.
Why not?
Posted by: Rich Shinnick | May 5, 2008 5:40:29 PM
I wonder how many Americans have cut back on their 401(k) contributions, as well, or stopped contributing altogether. That should be bullish for the market as well!
Posted by: Erick | May 5, 2008 5:53:15 PM
I've seen some similar stories in recent months coming out of EBRI, the Employee Benefit Research Institute.
Still, this is disturbing. Consider that some large percentage of American workers -- half or so -- have no or very minimal savings. So this means that of the half who HAVE saved something for retirement, 20% have dipped into it.
They used to talk about the three-legged stool of retirement: savings, pension and Social Security.
Now relatively few workers have a pension anymore; and with flat wages and spiraling costs, it's tough to save for retirement.
So two of the three legs are gone or at least wobbling.
I see a lot of cat food in America's retirement future.
Posted by: John Reinan | May 5, 2008 5:53:51 PM
"I see a lot of cat food in America's retirement future.
I really don't think this is likely...
(Cat food has become far too expensive)
Posted by: Pool Shark | May 5, 2008 5:57:17 PM
The most memorable thoughts I read on how the depression got started is as follows: People sold because they had to.
Posted by: bc | May 5, 2008 5:58:28 PM
“Sounds bullish to me . . .”
I assume you are being facetious. Although, on one hand, it would appear that boomers will need to keep salting money away, much of which should find its way into the stock market. But on the other hand, if they are already pulling it out via borrowing to support their debt overburdened lifestyle, then that means money is and will probably continue to be coming out of stocks for the duration of the recession.
Hussman said today that household debt is now greater than GDP. Sounds incredible to me, but that is what the data shows. I wonder if it includes money borrowed from their retirement accounts… probably not.
“Household debt now exceeds GDP for the first time in history, while total credit market debt is about 350% of GDP.”
http://hussmanfunds.com/wmc/wmc080505.htm
Posted by: KJ Foehr | May 5, 2008 6:05:00 PM
The HELOC piggy bank has run dry, so the 401k gets raided next to maintain the desired lifestyle?
Posted by: Lars | May 5, 2008 6:18:32 PM
PBS Frontline had a very informative and disturbing segment on the sad state of the retirement finances of most Americans...
http://www.pbs.org/wgbh/pages/frontline/retirement/view/
Retirement for most boomers is not going to be a pleasant experience.
Posted by: DownSouth | May 5, 2008 6:21:07 PM
So what're they buying with the money? If its plasma TVs, then I'm with Barry.
If they're buying something that isn't falling in price, that is an entirely different matter. Not every 401k will let you invest in something worthwhile.
There's myriad reasons for raiding -- most of them awful -- but a few are sensible. We have to be specific about where the money is going to determine the foolishness level.
k
Posted by: kents | May 5, 2008 6:36:50 PM
There may be more here than meets the eye. Suppose small investors (401K participants) don't see a future real return so the're pulling money out to buy something that will appreciate. With current inflation, interest is a joke and dividends a farce. It may be wishful thinking on my part but maybe the money isn't being misused, just reallocated.
To what? Any durable asset which is currently not in a bubble.
Posted by: AGG | May 5, 2008 6:41:50 PM
Lars: People tap retirement accounts/401k to survive not to support a lifestyle unless you include eating and a place to sleep as a lifestyle.
Posted by: johnnyvee@yahoo.com | May 5, 2008 6:43:17 PM
Good information, Barry, but I think the most significant implication is simply how hard it is for most U.S. citizens to give up their illusions of prosperity.
It is hard to admit that we have transormed this country into Brazil-America, and the only future for the great unwashed is as a cabanna boy.
Posted by: Winston Munn | May 5, 2008 6:45:36 PM
"Sounds bullish" ...
Yes, indeed. This bull really has many legs.
Does anyone feel pity for the American consumer. In the next leg he has to sell his organs?
Posted by: Our man in Helsinki | May 5, 2008 6:49:42 PM
bearish indeed, but when are stocks gonna plummet? Is everyone investing with extremely long-term horizons? Nobody is oblivious to negative signs, at what point has the negativity already been factored into the market?
Posted by: greg | May 5, 2008 6:53:44 PM
Any wagers on the suggestions of a holiday for the early withdrawal penalty?
Posted by: guest | May 5, 2008 7:21:37 PM
I guess I'm bearish... on the stock market anyway. I borrowed half the value of my 401K in January not for one particular thing, but to buy the other half of my house that I only half-owned (ideally I wouldn't have, but I've gotta' live somewhere), to finance a new A/C unit and counter-tops, and to buy a newer car. I also refinanced my house last month for the rest of that, so I could have easily borrowed completely from the mortgage at that time, instead. But, since the stock market and inflation suck, I figure I'd rather be paying myself interest rather than paying the bank while letting my 401K money sit there with no significant gains. I don't know how many people had the same idea as me, but I'm guessing most were doing it for more desperate reasons. Right now I'm working under the assumption that America is going to inflate its way to "relatively" lower stock and home prices, so better to spend now. We'll see if my gamble pays off.
Posted by: Brendan | May 5, 2008 7:25:17 PM
Yes, I agree this is bullish. Just like the soaring business and stock charts of pawn shops. Very bullish for the consumer balance sheet. All this cash coming out of the stock market should bolster the bottom lines of retailers and banks and therefore improve their P/Es wink wink.
Posted by: Greg Feirman | May 5, 2008 7:42:40 PM
"To what? Any durable asset which is currently not in a bubble."
Pls share. I want to buy some. thank you.
Posted by: Mark | May 5, 2008 7:46:24 PM
How many people do you talk to that know virtually nothing about investing? Most of the people that I talk to think they know something but actually are sheep waiting to get sheared. The collapse of private pensions has not sunk in to the worker bees yet. When it does, you will see the consumker confidence surveys plummet.
Posted by: larster | May 5, 2008 7:48:27 PM
This is certainly bullish because it shows that "the trivial many" are bailing out just as the market hits a short-term bottom. Just like it was a sell signal when more people where invested in stocks than ever before in 2000, and it was a buy signal when thousands of brokerage accounts were closed in 2002 as the market was bottoming then. You can count on the average person to time the market 100% wrong.
Posted by: Aaron | May 5, 2008 7:56:02 PM
Very bullish. Just think how much GDP would increase if 100% of workers had loans on their 401ks!
Posted by: Owner Earnings | May 5, 2008 8:15:21 PM
Conclusion: most will delay retirement.
Posted by: Mel | May 5, 2008 8:36:09 PM
I have a friend in L.A. who has been out of work the last nine months. Yes, he's raided his 401K -- not much choice.
Posted by: donna | May 5, 2008 8:40:25 PM
I was considering taking out a loan on my 401K too.
My 401k is held under Wachovia and there is of course no insurance for any investments made. The safest investment offered is AAA bonds and that's where all my money in the 401k is right now.
I considered taking out a loan to remove exposure in case bond markets fail and since these aren't likely to gain any real return.
The problem with taking out a loan is in most cases if you lose your job you have to pay the loaned amount immediately or face penalties.
Posted by: John Borchers | May 5, 2008 8:48:36 PM
I'm planning on raiding a 401(k) -- just not my own.
My plan hasn't taken shape yet. The idea is still in its infancy.
;-)
Posted by: Fat Tony | May 5, 2008 10:26:32 PM
