Don’t Borrow from Your Future

I asked my children how much they were putting into their 401k plan, and one said:

“Dad, I can’t afford to put money in a 401k.”

I didn’t have two nickels to rub together after I entered the workforce in the early 1980s, so I know what it means to live paycheck to paycheck.

Fortunately, I was so greedy that I couldn’t pass up the free 50% match from my employer, so I signed up despite my stretched finances. It wasn’t easy, but boy am I glad that I bit the bullet and put 6% of my salary into my 401k.

Those long-ago dollars have grown into a pretty nice chunk of change.

That’s the story that I have told all my children and I am very pleased to say that all of them have listened to me.

The 401k was created by the Revenue Act of 1978, which included an unheralded provision — Section 401(k) — that allowed employees to avoid being taxed on deferred compensation. It took a 1981 IRS ruling to permit employees to fund their 401k through payroll deductions ... and the rest is history.

Unfortunately, one-quarter of Americans aren’t taking advantage of a 401k. That’s right — 25% of Americans put ZERO into their 401k. Zip, zilch, nada!

That’s a huge retirement planning mistake, but one that’s understandable. The coronavirus pandemic is causing so much financial pain that millions of Americans are singing the I-can’t-afford-it blues.

A recent survey from Bankrate shows that 18% of Americans are contributing less to their retirement account. That 18% is pretty close to matching the one out of five Americans who have applied for unemployment benefits since March.

Sadly, the lower the income, the less they are saving compared to before the pandemic:

  • Below $30,000: 35% save the same
  • $30,000 to $49,999: 43% save the same
  • $50,000 to $79,999: 54% save the same
  • $80,000 and higher: 62% save the same

The reason for the reduced savings is simple: 62% cited a drop in income and 33% said they wanted to stockpile more cash.

And not only are people not contributing to their 401k accounts, they’re beginning to steal from them thanks to the CARE Act.

The CARE Act allows you to take penalty-free withdrawals out of your 401k if you, your spouse or dependent has been diagnosed with COVID-19 or experienced “adverse financial consequences” on account of being quarantined, furloughed or laid off, struggling with reduced hours or the closure of your own business or the inability to work due to lack of child care.

You can withdrawal up to $100,000 and avoid the 10% early withdrawal penalty if you’re under 59 and one-half. You will still owe income taxes on the money you take out but can spread that tax liability over the next three years.

Example: If you take out $30,000 this year, you could report $10,000 a year in 2020, 2021 and 2022. Alternatively, you can include the entire distribution in 2020 if you expect your income to be sharply higher next year.

While on the surface, this might seem like a good idea, but pillaging your 401k now should be your absolute last resort.

Why? Because you’re basically stealing from yourself. Could you imagine being a pensioner during this crisis? While everyone else has the ability to rebuild their savings, those who are retired don’t.

If they’ve contributed to their 401k and managed their money wisely, they’ll be able to weather this storm. But if they didn’t? If, in their youth, they chose not to contribute or borrow from their future? These times are even tougher.

I know it is easier said than done, but you need to do everything possible to keep up your 401k contributions.

And whatever you do, do NOT treat the newly passed CARE Act as a green light to raid your 401k.

Your retirement future depends on you not doing so.

Best wishes,

Tony Sagami

About the Technology Analyst

Even in the worst years for stocks, Tony was twice named “Portfolio Manager of the Year” by Thomson Financial. He was one of the first to introduce computer software for trading stocks. And in the early 2000s, he wrote “The Supernet,” providing a vision of the future internet that was far ahead of its time.

Top Tech Stocks
See All »
B
MSFT NASDAQ $420.89
B
AAPL NASDAQ $170.87
B
NVDA NASDAQ $904.15
Top Consumer Staple Stocks
See All »
B
WMT NYSE $60.56
Top Financial Stocks
See All »
B
B
V NYSE $277.93
B
JPM NYSE $199.74
Top Energy Stocks
See All »
B
B
CVX NYSE $157.12
B
COP NYSE $127.31
Top Health Care Stocks
See All »
B
AMGN NASDAQ $286.40
B
SYK NYSE $356.98
Top Real Estate Stocks
See All »
Weiss Ratings