Every Last Penny?
- 7.10.2007
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An alarming story in the Wall Street Journal online today highlights the recent uptick in loans against 401(k) retirement plans. Hat tip to Yves over at naked capitalism for picking up on it.
From the WSJ:
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.
…
“A few years ago, the buzz was about borrowing from a 401(k) to buy a second home,” says Jeff Carbone, a financial adviser in Cornelius, N.C. “Now it’s people looking at their 401(k) because they’ve extended themselves on their homes and credit lines.”
The numbers are preliminary and are too nascent to draw real conclusions about the loans, but the increased borrowing is noticeable and comes conveniently at a time when dropping home prices and tighter underwriting guidelines have made the access to cash via equity more difficult to the average American at a time when credit debt is ubiquitous.
Yves wonders if it is propping up consumer spending:
As the housing market has deteriorated, some observers expected to see a slowdown in consumer spending, since mortgage equity withdrawals have provided a boost in a period of stagnant real wages for average workers (last year, an exception to a longstanding trend, saw a wee pickup).
But defying this logic, consumer spending has continued to be fairly robust. What gives?
It turns out that there are signs that consumers are raiding a different piggybank, namely, their retirement accounts. And while 401(k) plans do permit borrowing, most advisers recommend against it, since the interest isn’t tax advantaged and failure to repay results in nasty penalties.
I think that rather than extending consumer spending 401(k) borrowing would be a sign of last resort debt service attempts. If you’re mortgage is exploding, or you’ve lost your job (or seen a downturn in salary) you would only tap your nest egg as an emergency parachute; not to buy a fancy new toy. Either way, whether it is fueling consumer spending or if it is being used to pay off years of unsustainable debt accumulation, it is a scary trend.
Families, who drank the kool aid, the myth that their home would always bail them out with cash and equity, are in serious trouble already. If they are raiding their retirement accounts now - who’s going to pay for them when they get older? If we’re talking about a bail out of housing now versus the bail out of a generation of Americans who gorged on consumerism at the expense of responsible retirement planning - which is going to be more expensive and painful for us in the long run?
Yikes.
