HOUSTON—A record number of people are tapping into their retirement savings to make it through the economic downturn and one financial consultant wants to offer advice on how to keep your head, and pocketbooks, afloat.
Fidelity, which manages 401(k) plans for 11 million Americans, found that the number of people taking loans or hardship withdrawals from their retirement plans is higher than ever before.
Ray Fraise is one inventor who says he knows hardship all too well. Fraise, who invented the EZ time self-cleaning table, survived Hurricane Katrina—but lost everything. He started over in Houston and five years later, he’s been hit again.
"You do what you have to do to survive," said Fraise.
Fraise is now out of a job, in his 60’s and only farther away from retirement after dipping into his retirement plan.
"I’ve already taken it, because unemployed, I had to supplement my income. So I was eligible, I took it," he said.
Fraise is not alone. Financial consultant Laury Adams said these days, retirement is more of a theory than a reality for many.
"People feel very out of control even in their own finances now," said Adams.
Adams cautions against taking a loan, or worse, a hardship withdrawal from your 401(k).
"If you take that hardship withdrawal, there is a 10 percent penalty, plus the taxes you have to declare on your income tax," said Adams.
With taxes and penalties, here’s how a hardship withdrawal ends up working out.
For instance, if you took an initial withdrawal of $10,000, the first thing you would do is pay a 10 percent penalty—that’s $1,000.
Then you’re taxed on the money. For example, if you fall in the 28 percent tax bracket. That’s $2,800.
So, out of the $10,000 initial withdrawal, you’re only left with $6,200.
"You’re penalized for the rest of your life for having tapped into it early. It wasn’t something I wanted to do, but the way things are now, you do what you have to do to survive," said Fraise.
Adams said there are ways to help you avoid tapping into your 401(k).
One suggestion is to create a survival budget, spending money on only what’s necessary to live. Another option is to pay only the debt minimums on bills. Finally, Adams said you can stop contributing to employee savings plans.
Adams said squirreling away as much money as possible is one way to weather the financial storm until it clears.
