Borrowing from retirement
A report recently released found Americans have increasingly used funds from their retirement investments for daily expenses – and this is before they have retired. How are they doing it, and is it a good idea? N.C. State University economist Mike Walden answers.
“Well, what they’re doing … is borrowing against those retirement funds, which is an option. Now they could simply take that money out of their retirement funds. Generally that’s not a good idea, because, number one, if those retirement funds had not been taxed when the money was put in, which is usually the case, you’ll have to pay taxes on them. And then if you’re under a critical age – … if you’re less than 60 – you’re going to have to pay a 10 percent penalty. So, oftentimes it’s … better to borrow against those monies if you’re going to do it.
“And this recent study did show that over the last couple of years people have increasingly been doing that, borrowing against retirement funds to use those monies to, for example, … pay the mortgage, pay the credit card bill, other expenses.
“Obviously this is a trade-off. They’re using that money now. They’re going to have to pay it back later. Therefore, that money will not be available for retirement, or they won’t be able to put as much money in for retirement.
“So it is one of those things where a person – particularly if they’ve, for example, … lost their job (or) they’ve had their hours cut back – they have to make a tough decision. And so I think this trend that we did have seen over the last couple of years is a sign of simply how tough the financial situation has been for many households.”
Category: Economic Perspective