Tough economic times have pushed many people to look at borrowing from or cutting back the donations they make to their retirement funds. Jonathan Fox, director of the Financial Counseling Clinic at Iowa State University, says a recent study showed one in four people had dipped into their retirement accounts to pay their mortgage, credit cards and other bills.
He says borrowing from your 401-K comes with penalties for early withdrawal. “On top of that, the real loss is the earning potential from those early savings that you have in your retirment account,” Fox says. “And that’s where — that miracle of compound interest — you see the huge hit that you are going to take out in retirement in terms of what you are going to be able to save. Those early savings are so critical, so if it can be avoided, it simply has to be avoided.”
Fox says cutting back or stopping contributions to your retirement plan should be a short-term option. “If it helps you accumulate an emergency fund or some resources for other items that you can’t use your retirement fund for penalty free — then it certainly beats the alternative of having to dip into the account,” Fox says.
He says overall you are better off sticking to your retirement plan, working with your retirement advisor to try and meet your retirement saving goals. If your employer matches your retirement contributions, you also lose that amount when you cut back or stop making contributions.
Stopping contributions to your retirement fund is different than adjusting them up and down. “It’s to be expected that your retirement contributions will fluctuate, but certainly it’s not the ideal situation where you are forced to make that adjustment,” Fox says. He says the ideal is to set a retirement savings goal and stick with it.
Fox says if you haven’t set a retirement goal, now is the time, so you have made some progress if you employment situation changes. “Sadly, most people don’t make a legitimate swing at the estimate, and I use the word swing, there in fact a really neat website titled ‘ballpark estimates of what you need for retirement,’ and there’s all sorts of estimators and calculators. And studies show…far less than half of us are actually using those,” Fox says.
Setting a retirement goal forwhat you might need requires you to sit down and determine the lifestyle you see for yourself years from now, and Fox says that’s one reason why many people don’t take action. It’s not just something that can impact your retirement, it may also impact your current situation.
“There’s many folks who don’t do these estimates that might be saving too much,” he explains. “I know it’s a little contrary to what we’ve been thinking about in these economic times. But that’s an equally dangerous mistake. Meaning that you’re not able to live the level of living and the life that you could be living right now. You’re almost over sacrificing, it’s a side that a lot of people don’t think about.”
Fox says it’s best to try and cut back in other areas and avoid tapping into your retirement fund if at all possible.