Passive Family Income » retirement planning

3 Reasons Why You Should Not Touch Your Retirement Savings

John S. — Wed, 01 Apr 2009 12:09:55 +0000

Do you have a 401k, IRA, or any other type of retirement savings? Has the global economic recession altered how you approach investing for your retirement? With the lack of trust on Wall Street as well as long time investors losing most of their investment nest egg – many people are now changing the way they invest for their retirement years. Unfortunately, many of these changes include reducing the amount contributed or worse – a complete withdrawal of funds from the account.

The reasons for reducing contributions to a retirement savings account vary, but overall people are strapped for cash and are looking for money to pay their bills. In some cases, an employee may decide to cut back on their individual contributions from a company sponsored retirement savings plan to make more cash available in the short term. In more extreme cases, investors are pulling the entire savings out of their retirement accounts so they can stay afloat and get back on their feet.

While reducing retirement savings contributions or withdrawing money from an IRA account may be the only option for some people, here are 3 reasons why you should think twice about doing so.

Tax Implications – Reducing your contribution percentage from a company sponsored 401k plan, for example, will increase the amount of taxes you end up paying. Remember that reducing your elections does not translate into a dollar for dollar savings in your paycheck. Instead, you will pay more taxes and get a lower amount back than you may have originally expected.
Early Withdrawal Penalties – Those looking to cash out of their IRA retirement savings plan, for example, will get hit with huge penalties. While you may need the cash to make ends meet, be sure this is your absolute last resort before making this decision. The penalties you will be forced to pay are probably not worth it.
Company Match – If your employer has a company sponsored retirement plan that they match, be sure to continue to take advantage of that offer. While many companies are cutting out the retirement savings sponsorship, there are still many that offer it. If a company matches dollar for dollar up to 5%, then be sure to continue to elect at least 5%, regardless if you decrease your elections. That company match is an opportunity you should not ignore!

The Non-Savers

While the statistics on investors reducing their retirement savings investments is a concern, what is even more troubling are the thousands of people who have never saved a dime for their retirement. I have known (and still do) several people who have jobs that don’t take advantage of their company sponsored retirement savings plan. I also know people who had contributed to a retirement plan at a former job and instead of rolling it into another plan when they left, they decided to cash out. Both of these examples were several years back when their was strong economic growth. I can only expect that these numbers are rising as people are looking for extra cash or don’t care about saving for their retirement – especially in a recession.

Final Thoughts

I am concerned about the impacts from the lack of managing retirement savings for thousands and thousands of people will have on our economy over the next 50 years. While times are very tough right now, what will happen when all of these individuals are at their retirement years with no savings? They most certainly will be forced to work later in life, but what kind of impact will this have on our workforce? Or worse yet, what kind of impact will this have on our government aid programs for retirees?

Next Steps

I completely understand that times are very tough and people need cash. Turning to your retirement savings may be your last resort before bankruptcy to pay the bills and put food on the table. However, I encourage anyone to keep investing into their retirement savings if they can. Make sacrifices elsewhere and only look to your retirement savings as a last resort.

It is also understandable for investors to be cautious about investing again – especially into a retirement savings account that has lost a lot of its value in the last several months. I know that I lost well over 30% in my account just last year. If you are still unsure about getting back into the market, then put your money into a certificate of deposit or FDIC insured savings account. The point is to keep investing a portion of your income now so you can benefit in the future!

Have you cut back on your retirement savings as a result of the global economic recession?

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Are the Rules of Retirement Changing?

John S. — Thu, 15 Jan 2009 13:49:30 +0000

Have the traditional rules of retirement started to change? Not that there was ever a ‘set in stone’ model in place, but I can remember growing up when people would retire between 55 – 62 years of age. Nowadays it seems like that number may be jumping closer to 70 years. The global recession is starting to play a major role in employees’ retirement plans. I have seen several cases where companies are starting to cut their 401k company match in an effort to cut costs. I guess that is better than cutting jobs, but now is the time for people to invest in 401k plans – not cut back.

I have personally witnessed a change in the behavior and rules of retirement for several people who are very close to me. The following are examples of people I currently know whose retirement is directly impacted by the current economic crisis.

Temp Worker – I have become close with a temp worker in my current job. She has been with our company for about 18 months and is close to 70 years old. A few years ago, she and her husband had a very nice retirement nest egg. The only reason that she and her husband held temp jobs was to pay for their travel and vacations. Now she is doing everything she can to keep her temp job so that they can pay for their rising health care costs and prescriptions. Their once healthy retirement portfolio has almost been cut in half.
Manager – My direct supervisor was about a year away from retirement at the start of last year. He had plans to start spending more time with his hobbies in life and his family. Retirement would have allowed him to start doing the things he really wanted to do in his retirement years. Based on the assets now leftover in his 401k, he no longer believes he has the money to retire and is changing his rules of retirement by planning to work at least 5 – 7 more years.
Mother-in-law – My mother-in-law had about 2 – 3 years of work remaining before she planned on retiring. She is a schoolteacher and will have a pension to help pay the bills when she decides to retire. That pension was setup to payout funds based on averaging out her last 3 years of salary. Due to budget cuts and school deficits, her salary will probably decrease over the course of 3 years pushing her pension down with it – along with her rules of retirement.

All of the financial experts are saying not to worry about the stock market, your 401k, and your retirement. They are saying that now is the time to keep investing and your 401k portfolio will build back up. I feel fortunate enough that I am in my mid-30s and have lots of time on my side. I have the time to build my 401k back up in order to still have a healthy retirement. The same can’t be said for the individuals I mentioned above. They are all bordering on their retirement years and are now impacted by the global recession. While these people have money for food and can still pay their bills and mortgage – their plans for retirement that they worked so hard for are now gone.

Taking Control

I think this is an excellent time for people to start thinking differently about their retirement. I challenge anyone who reads this post to change your mindset and start taking control of your finances and retirement planning. Gone are the days of retiree medical benefits and pension plans. Even if you have some of these benefits through your employer, you can never be sure that the company will be around by the time you retiree. My father worked for one of the Big 3 auto companies and never thought one or even two of them could possibly go out of business. Company 401k matches and other health benefits are being cut – so why not take control of your own destiny? Why not define your own rules of retirement?

I personally hold myself responsible for my family’s retirement planning. I will not count on Social Security benefits to be around when I retire. Nor will I look for Medicare or retiree medical benefits. I am assuming the worst and planning for it. I can sum it up in two simple words – financial freedom. That is my ultimate personal finance goal and where I plan to be someday.

Are you defining your rules of retirement? Or are you going to allow other factors dictate your retirement plans?

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