from a professional investors' BBS ...
(snip)"Record numbers of Americans are raiding their retirement savings as the economy has soured, threatening their long-term financial security to make their mortgage payments, pay medical bills, and cope with rising food and fuel costs.
Three decades ago, individually controlled retirement plans like 401(k)s barely existed. Most Americans counted on a pension, with funds contributed and managed by their employer, to provide for retirement along with Social Security payments. But today, workers have accumulated $3 trillion in 401(k) accounts - up from $1.6 trillion in 2002 - making them a tempting target for households looking to get through tough times.
The three largest administrators of 401(k)s - Fidelity Investments, CitiStreet, and Vanguard Group Inc. - report a growing number of early withdrawals from the plans in the past year as saving for retirement has taken a backseat to mortgage payments, medical bills, and rising food and fuel costs.
At Fidelity of Boston, the largest retirement plan administrator in the country, the number of people making hardship withdrawals rose 17 percent last year. At Vanguard, hardship withdrawals rose 16 percent in 2007, to 47,197. The share of all custom ers making hardship withdrawals remains relatively low, however; at Vanguard, 1.5 percent of customers made early withdrawals last year, up from 1.2 percent in 2002.
"It's another measure of economic stress among households," said Stephen Utkus, retirement research director at Vanguard in Pennsylvania. "I suspect you'll see people dropping out of 401(k) plans or ending their contributions because they can't afford to save."
Fund executives link the withdrawals to the slowing economy. "We're hearing everything from 'my gas bills are too high' to 'I'm going to a funeral and need to pay for a plane ticket,' " said Bob Gonzalez, who manages a call center for the retirement services group of Wachovia Corp.
James Olson, a minister of the United Church of Christ, lost his position at Boston University last summer, and his job search has taken longer than expected. To meet expenses like the rent on his Jamaica Plain apartment, Olson raided his 401(k) retirement savings account. Olson, 39, said retirement is too far off for him and his husband to think about now. "We did what we needed to do to keep going," Olson said.
Most financial planners strongly discourage clients from withdrawing funds from retirement plans because of the taxes and penalties involved. Still, most retirement savings plans allow workers to tap their money before age 59 1/2 either through a loan, a hardship withdrawal, or by rolling the funds into an individual retirement account if they leave their current employer.
Loans may not help in the short run since they must be paid back. For a hardship withdrawal, plan participants must demonstrate they face a difficult financial situation such as high medical bills, educational expenses, staving off foreclosure, or fixing a home damaged by a storm or other natural disaster. Exactly what situations qualify as a hardship is defined by each retirement plan, and generally plans aren't required to do much probing of the employee's total financial picture.
One drawback to taking a hardship withdrawal is that the money is counted as part of an employee's gross income, increasing the amount subject to taxation and, in some instances, putting the employee in a higher tax bracket. Also, most plans won't accept new contributions from the employee or the employer for at least six months after a hardship withdrawal.
According to Vanguard, the average hardship withdrawal last year was $6,194, down from $6,811 in 2006. Vanguard's Utkus estimates that, in many cases, customers are withdrawing more than half of their account's assets.
The growth of hardship withdrawals is cause for concern among many financial specialists who say people aren't saving enough for retirement as it is. Richard Gottlieb, a Boston bankruptcy attorney, says that a quarter of the 150 clients he sees in a typical month have taken a hardship withdrawal at some point, but that still hasn't kept them from seeking protection from creditors. Many, he said, were trying to stay in a house they couldn't afford in the first place. "People will do almost anything to save their homes," he said.
Some people still say their hardship withdrawals made sense. In Salem, Russ Austin, a mechanical buyer for an equipment manufacturer, said he took out $9,000 from his Fidelity 401(k) to pay for a funeral and estate-settlement costs after his mother died in April. Austin's age, 62, meant he didn't face penalties on the withdrawal. He figures his account balance of about $600,000 can absorb the expense plus the extra 15 percent of the withdrawal, $1,350, he set aside to pay taxes he will owe on the money next year.
"I know there are a lot of people doing this with their backs against the wall, but that's not my situation at all," Austin said. "This withdrawal isn't going to put my retirement in jeopardy," he said, adding he expects to work at least another two years.
But stories from other people who made hardship withdrawals share a common theme: people facing a rough patch with few emergency funds to fall back upon. In Las Vegas, medical specialist Mary E. Estes said she came home from a trip in October to find her condominium destroyed by a flood. Medical problems, including an inflamed lung, then kept her out of work.
The situation left her with $35,000 in medical bills, plus an $880 monthly mortgage payment even while staying with relatives as her condo was repaired. Strapped, the 60-year-old said she has taken out more than $60,000 from two 401(k)s whose total value stood around $90,000 in the fall. She started both around 2000 and still hopes to work long enough to replenish them, health permitting, before retiring. "It's only assuming my strength comes back enough, otherwise I'm really up the creek because my supporting resources are now gone," she said.
Some advisers say people should consider filing for bankruptcy protection rather than dipping into a 401(k), which is usually protected from creditors. As a result, the 401(k) "is the last piggy bank to break open," said Leslie Linfield, executive director of the Institute for Financial Literacy, a nonprofit organization in Portland, Maine, that promotes financial education"(snip)
... I took several points from this news blurb
- a demographic time bomb is being created as people in their 50's are now choosing to liquidate their retirement savings in order to (temporarily) stave off bankruptcy rather than declaring bankruptcy and making a major lifestyle change. This merely postpones the problem, which will leave people in their 60's with little or no retirement assets other than Social Security - which will also leave people in their 60's unable to afford retirement thus forcing them to keep working - which will also mean fewer available jobs for younger people.
- the 401k & IRA assets being liquidated are predominantly US stocks and bonds. Increased 'selling' in the absence of increased 'buying' will serve to exert downward pressure on the US stock and bond markets.



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