Fidelity: 401(k) hardship withdrawals, loans up

[marmar]

In the wake of news about a spike in new applications for unemployment benefits comes another potentially troubling sign: A record number of workers made hardship withdrawals from their retirement accounts in the second quarter.

What's more, the number of workers borrowing from their accounts reached a 10-year high, according to a report issued Friday by Fidelity Investments.

The trends reflect the financial stress many workers find themselves in as the economy struggles to find sure footing, said Beth McHugh, Fidelity's vice president of marketing insight.

High unemployment and companies cutting back on overtime or overall hours have reduced the take-home pay of many workers.

"People tend to be taking home less," she said. "As a result the percentage of individuals initiating hardship distributions is one of the things we're concerned about."

Fidelity administers 17,000 plans, which represents 11 million participants. In the second quarter, some 62,000 workers initiated a hardship withdrawal. That's compared with 45,000 in the same period a year ago.

What's also eye-opening is that 45 percent of participants who took a hardship withdrawal a year ago, took another one this year, McHugh said. ..........(more)

The complete piece is at: http://hosted.ap.org/dynamic/stories/U/US_401K_ECONOMIC_HARDSHIP?SITE=NVLAS&SECTION=HOME&TEMPLATE=DEFAULT

[Omaha Steve]

1. K&R!

[Yavin4]

2. For Years, Financial Advisors Have Been Giving People Bad Financial Advice

They've told people that they should dump all of their excess cash into 401(K)s when that was a poor advice. The correct advice to tell people is to spend, save, and invest based on your short-term, medium-term, and long-term risks.

Retirement is a long term risk. If you have a lot of credit card debt, student loans, an adjustable mortgage, and other expenses, but you also have a 401(K) then what you're doing is ignoring your short term risk of credit default while addressing your long term risk.

This is a mistake, and because of the recent downturn, short term risks are coming to life and people are not prepared for it. That's why they're scrambling to take money out of their 401(K) at huge penalties.

[Statistical]

3. Which is why Roth IRA is superior.

After 5 years (from date of opening or conversion) you can withdraw the principle and pay only 10% penalty with no interest.

I find the Roth IRA to superior in this respect

Some companies now have "Roth 401K" which work under same IRS rules as Roth IRA.

[Yavin4]

4. You Shouldn't Be Investing for Retirement Until Your Short and Mid Term Risks Are Mitigated

You have to take a full accounting of all of the risks that confront you: defaulting on credit cards, loss of your home, loss of your job, medical emergencies, etc., and then develop a mitigation strategy for each one of these risks.