Just because you can take a retirement plan loan doesn’t mean you should – Carosa

We had a terrible recession in the early 1980s. It came after years of stagflation. It came in the midst of some of the highest interest rates ever recorded. Worse, it came as our nation stood on the cusp of transitioning from a manufacturing economy to an information-based economy.

That transition, unfortunately, left hardened laborers on that cusp for too long. For example, steelworkers gave their all for a dying industry only to be left empty-handed. However, they weren’t really poor.

In fact, many were asset rich, just cash poor. That meant their house was worth too much for them to qualify for aid. In order to survive, then, they had to sell the very homes they worked so hard to earn.

Sounds screwy, right?

Believe it or not, we may be about to experience that incredible feeling of déjà vu, (see “Retirement Plan Pros Speak Out on CARES Act From a Fiduciary Perspective,” FiduciaryNews.com, April 7, 2020). Here’s why.

It doesn’t take a rocket scientist to predict we’re heading for a recession as long as people can’t work. And that’s going to lead to hard times for many. For some, they’ll have no choice but to take money out of their retirement plans prematurely. They’re not poor. They’re just cash poor. Most of their liquid assets are in their retirement plans.

For others, they’ll only think they have no choice but to take money out of their retirement plans prematurely. These people will suffer the most. Here’s why.

Think about what it means to prematurely withdraw money from your retirement plan. It means one of two things.

First, you’re going to pay it back within the three years allotted by the CARES Act. Still, you may not recover the lost gains you’re giving up by taking the money out at what many believe to be a severe market bottom. This leaves you with a smaller nest egg than if you hadn’t touched your retirement account in the first place.

The second option is much worse. You don’t pay it back. This is a double hit. First, the money you take out is taxable if you don’t pay it back into your retirement plan. In other words, it will cost you money to get access to your money.

In truth, that’s the general rule with tax-deferred saving anyway, so you might not consider that a big deal.

But this next part is a big deal.

By taking out your retirement funds well in advance of retirement, you stand the risk of forfeiting a comfortable retirement. Take enough money out and you’ll be removing the chance you can retire in any sense of the word.

And that just may be a form of elder self-abuse.