In this week’s video, Casey discusses the growing rate of people taking hardship withdrawals from their 401(k) plans.
It’s great that folks want to get invested in the market, but it shouldn’t come at the expense of having an emergency fund in a savings account.
Tune in to hear the hybrid approach Casey proposes for those that aren’t sure about when they’ll need excess funds.
Show Notes
Loans and Hardship Withdrawals From 401(k)s Are Increasing – Bloomberg
Is Getting a Late Start on Retirement Savings Okay? – Mullooly Asset Podcast
Taking a Hardship Withdrawal From Your 401(k) – Full Transcript
Casey Mullooly: In Episode 318, we talk about cashing out your investments because you have to. Welcome back to the Mullooly Asset Show. I’m your host, Casey Mullooly, back with you at for Episode 318. Hope everyone had a good Thanksgiving here, and 2022 is almost over.
Can you believe it? Many people in the personal finance industry will recommend that if your employer offers retirement plan match like a 401k match that you should do it always. You should always do it because it’s free money after all. And I think that that’s mostly true, but if you can afford it from a cash flow perspective.
If your employer offers a three, four, 5% match, that might only mean two or 300… two to 300 or $400 that you’re stocking away each month in a 401k. And while that seems or might be a small amount of money to you, would it be better invested and doubled in a retirement account that you can’t access for maybe 40 years? Or would it be better in a savings account, or you have the flexibility to access at any time you want?
Talking about this all, because recently Bloomberg put out an article that reported on 401k hardship withdrawals are increasing at a pretty substantial clip. They increased 24% year over year from last September 2021 to this September 2022.
Overall, the number of hardship withdrawals is only 1.3%. So, the overall number isn’t high, but it is growing at, like I said, a pretty substantial clip there. It could be a sign of people overextending themselves or just people in financial stress. So, this was reported on by Bloomberg and they were referencing a study done by Empower, which is a retirement account provider.
So, would I even be an investment advisor if I didn’t take this opportunity to talk about the importance of an emergency or reserve account? I get it, that socking away in a good old-fashioned savings account is boring.
And if we’re talking in two, 300, $400 increments, then it’s going to take a while for that to add up and it’s not going to feel like you’re making a lot of progress. It would be more fun and exciting to invest it in some exciting companies, but it might hurt you and it might cost you in the long run.
Plus, most online savings accounts are paying between two and 2.5% now. So, it’s nothing that adds up over time. So, it’s important to give every dollar a job, but it’s perfectly fine. In fact, I think it’s a good thing to start small, maybe really small when it comes to putting money in a retirement account like a 401k.
Yeah. You might be passing up that employer match, but like I said, you’re getting that flexibility and you’re not going to be overextending yourself out and putting yourself in a situation where you need to take money back out, break up the compounding, pay the tax, and just create a whole host of problems for yourself.
Another option for you there, a hybrid approach, is to consider just a regular taxable brokerage account. If you want to invest money above and beyond your emergency fund and you don’t want to lock it up for 20, 30, 40 years. You can just invest in a regular brokerage account and all you have to worry about is capital gains. But you can take that money back out at any point in time.
So, hopefully this video will… hopefully you learned your options and you learned how to not put yourself in the spot of taking hardship withdrawal from your 401k planned. If you got to do it, you got to do it. We understand life happens, but there are ways and things that you can thread that needle and not put the cart before the horse. So that’s going to do it for Episode 318 of the Mullooly Asset Show. Thanks as always for tuning in. We’ll be back with you next week.