In this week’s Mullooly Asset Management podcast Tom and Brendan continue talking about the foundation of financial planning. This week the topic they discuss saving money and your retirement plan. Saving money is a lost habit. In a recent Washington Post article (included in this post) it says that one in four people today take loans from their 401k plan. Personally we think that percentage is a little bit higher (around 40%). This tells us that people are consistently living beyond their means. People should reconsider where their money is going each month. This is an issue of financial planning, and professional help might be the best way to face the issue. Taking a loan from your 401k plan is really not a good solution. You are hurting yourself.
There are two types of loans that can be taken from a retirement plan. As far as financial planning is concerned, the first one might not be that bad. This loan allows you to take a loan out if you are buying your first home. It also gives you the span of 15 years to pay the loan back. This is reasonable and buying a home is a good thing! However, the other loan is the one you should be looking to stay away from. This is a personal loan and you are allowed to take either $50,000 or 50% of your account’s balance. The catch is that you have to pay this type of loan back in five years. This means you are setting yourself up for a fixed-rate, five year loan. The loan becomes taxable income and there is a 10% penalty if you cannot make your payments too.
Tom and Brendan also discuss how 401k plans have become the primary means of funding retirement. Another statistic from the same Washington Post article says that in 1980 four in five workers had a pension. Today that number has dropped to one in five. We all know that social security isn’t going to fund your retirement. If you take big loans from your 401k plan to cover expenses now, there is a good chance that you might outlive your money in the future. It is a scary prospect to consider, and Tom goes through an example of how this could potentially happen.
There is so much to learn about financial planning and this week’s lesson on retirement plans and saving money is a great example of that.
Mullooly Asset Management strongly urges our listeners and readers talk with their personal investment adviser before making any choice to buy or sell any investments. None of the securities mentioned in this podcast or blog post are considered investment advice. If you do not have an investment adviser please do not hesitate to contact Mullooly Asset Management through phone call or email.