Raiding the 401(k)

Wow, I found this shocking:

"Borrowing from retirement plans is surging.

At the end of last
year, 18% of workers had loans outstanding from their plans, up from
11% in 2006, according to a survey of 2,011 full-time employees
released in February by the Transamerica Center for Retirement Studies,
a nonprofit corporation funded by Aegon NV’s Transamerica Life
Insurance Co.

With home prices falling nationwide, the loans may be a
sign that cash-strapped consumers are raiding their nest eggs to stay
afloat, no longer able to tap their houses for cash and up against
their credit-card limits . . .

Last year, 52% of workers with annual incomes of $50,000 to $100,000
said they planned to rely primarily on 401(k) plans and IRAs to pay for
living expenses in retirement, up from 46% in 2006, according to the
Transamerica survey. The percentage counting on Social Security also
increased, to 19% from 13%, while those counting on a company-funded
pension plan dropped to 11% from 18%."

Sounds bullish to me . . .


Raiding the 401(k) Nest Egg
WSJ, May 5, 2008; Page R1

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What's been said:

Discussions found on the web:
  1. Rich Shinnick commented on May 5

    Normal people unlike the government can’t just print money. The government, however, can just print money and send it to them.

    Why not?

  2. Erick commented on May 5

    I wonder how many Americans have cut back on their 401(k) contributions, as well, or stopped contributing altogether. That should be bullish for the market as well!

  3. John Reinan commented on May 5

    I’ve seen some similar stories in recent months coming out of EBRI, the Employee Benefit Research Institute.

    Still, this is disturbing. Consider that some large percentage of American workers — half or so — have no or very minimal savings. So this means that of the half who HAVE saved something for retirement, 20% have dipped into it.

    They used to talk about the three-legged stool of retirement: savings, pension and Social Security.

    Now relatively few workers have a pension anymore; and with flat wages and spiraling costs, it’s tough to save for retirement.

    So two of the three legs are gone or at least wobbling.

    I see a lot of cat food in America’s retirement future.

  4. Pool Shark commented on May 5

    “I see a lot of cat food in America’s retirement future.

    I really don’t think this is likely…

    (Cat food has become far too expensive)

  5. bc commented on May 5

    The most memorable thoughts I read on how the depression got started is as follows: People sold because they had to.

  6. KJ Foehr commented on May 5

    “Sounds bullish to me . . .”

    I assume you are being facetious. Although, on one hand, it would appear that boomers will need to keep salting money away, much of which should find its way into the stock market. But on the other hand, if they are already pulling it out via borrowing to support their debt overburdened lifestyle, then that means money is and will probably continue to be coming out of stocks for the duration of the recession.

    Hussman said today that household debt is now greater than GDP. Sounds incredible to me, but that is what the data shows. I wonder if it includes money borrowed from their retirement accounts… probably not.

    “Household debt now exceeds GDP for the first time in history, while total credit market debt is about 350% of GDP.”

  7. Lars commented on May 5

    The HELOC piggy bank has run dry, so the 401k gets raided next to maintain the desired lifestyle?

  8. kents commented on May 5

    So what’re they buying with the money? If its plasma TVs, then I’m with Barry.

    If they’re buying something that isn’t falling in price, that is an entirely different matter. Not every 401k will let you invest in something worthwhile.

    There’s myriad reasons for raiding — most of them awful — but a few are sensible. We have to be specific about where the money is going to determine the foolishness level.


  9. AGG commented on May 5

    There may be more here than meets the eye. Suppose small investors (401K participants) don’t see a future real return so the’re pulling money out to buy something that will appreciate. With current inflation, interest is a joke and dividends a farce. It may be wishful thinking on my part but maybe the money isn’t being misused, just reallocated.
    To what? Any durable asset which is currently not in a bubble.

  10. commented on May 5

    Lars: People tap retirement accounts/401k to survive not to support a lifestyle unless you include eating and a place to sleep as a lifestyle.

  11. Winston Munn commented on May 5

    Good information, Barry, but I think the most significant implication is simply how hard it is for most U.S. citizens to give up their illusions of prosperity.

    It is hard to admit that we have transormed this country into Brazil-America, and the only future for the great unwashed is as a cabanna boy.

  12. Our man in Helsinki commented on May 5

    “Sounds bullish” …

    Yes, indeed. This bull really has many legs.

    Does anyone feel pity for the American consumer. In the next leg he has to sell his organs?

  13. greg commented on May 5

    bearish indeed, but when are stocks gonna plummet? Is everyone investing with extremely long-term horizons? Nobody is oblivious to negative signs, at what point has the negativity already been factored into the market?

  14. guest commented on May 5

    Any wagers on the suggestions of a holiday for the early withdrawal penalty?

  15. Brendan commented on May 5

    I guess I’m bearish… on the stock market anyway. I borrowed half the value of my 401K in January not for one particular thing, but to buy the other half of my house that I only half-owned (ideally I wouldn’t have, but I’ve gotta’ live somewhere), to finance a new A/C unit and counter-tops, and to buy a newer car. I also refinanced my house last month for the rest of that, so I could have easily borrowed completely from the mortgage at that time, instead. But, since the stock market and inflation suck, I figure I’d rather be paying myself interest rather than paying the bank while letting my 401K money sit there with no significant gains. I don’t know how many people had the same idea as me, but I’m guessing most were doing it for more desperate reasons. Right now I’m working under the assumption that America is going to inflate its way to “relatively” lower stock and home prices, so better to spend now. We’ll see if my gamble pays off.

  16. Greg Feirman commented on May 5

    Yes, I agree this is bullish. Just like the soaring business and stock charts of pawn shops. Very bullish for the consumer balance sheet. All this cash coming out of the stock market should bolster the bottom lines of retailers and banks and therefore improve their P/Es wink wink.

  17. Mark commented on May 5

    “To what? Any durable asset which is currently not in a bubble.”

    Pls share. I want to buy some. thank you.

  18. larster commented on May 5

    How many people do you talk to that know virtually nothing about investing? Most of the people that I talk to think they know something but actually are sheep waiting to get sheared. The collapse of private pensions has not sunk in to the worker bees yet. When it does, you will see the consumker confidence surveys plummet.

  19. Aaron commented on May 5

    This is certainly bullish because it shows that “the trivial many” are bailing out just as the market hits a short-term bottom. Just like it was a sell signal when more people where invested in stocks than ever before in 2000, and it was a buy signal when thousands of brokerage accounts were closed in 2002 as the market was bottoming then. You can count on the average person to time the market 100% wrong.

  20. Owner Earnings commented on May 5

    Very bullish. Just think how much GDP would increase if 100% of workers had loans on their 401ks!

  21. Mel commented on May 5

    Conclusion: most will delay retirement.

  22. donna commented on May 5

    I have a friend in L.A. who has been out of work the last nine months. Yes, he’s raided his 401K — not much choice.

  23. John Borchers commented on May 5

    I was considering taking out a loan on my 401K too.

    My 401k is held under Wachovia and there is of course no insurance for any investments made. The safest investment offered is AAA bonds and that’s where all my money in the 401k is right now.

    I considered taking out a loan to remove exposure in case bond markets fail and since these aren’t likely to gain any real return.

    The problem with taking out a loan is in most cases if you lose your job you have to pay the loaned amount immediately or face penalties.

  24. Fat Tony commented on May 5

    I’m planning on raiding a 401(k) — just not my own.

    My plan hasn’t taken shape yet. The idea is still in its infancy.


  25. ronin commented on May 5

    Considering the tax penalties of raiding the 401k, this must be an act of desperation.

    The retirement ‘footstool’ has become a pogo stick.

  26. Richard commented on May 5

    i sold 20% of my equity positions last week not because i’m stupid and am wrong 100% of the time but because everyone on whore street is saying the recessions will be short and shallow and sunny skies are ahead. meanwhile all i see are further dark clouds on the horizon and nothing potent enough to wish them away. i plan on buying back in slowly once the banks bottom out and that could take 6-12 months at this rate.

  27. Franklin commented on May 5

    Re: “I wonder how many Americans have cut back on their 401(k) contributions, as well, or stopped contributing altogether. That should be bullish for the market as well”,

    Sure, thing, moron

  28. x-401k phone monkey commented on May 5

    I don’t know what most loans are for now in the worsening economy but I worked in the 401k dept of a major wirehouse for 3 years. We did have plenty of displaced workers who had to raid the 401k for basic necessities. But there was plenty of ‘non-essential’ purchases with the loans. And yes, to some poeple it was basically another form of revolving credit. And in the ’03-’06 real estate bubble run-up, you had people borrowing for down payment money…then apply for a Hardship withdrawal 2 years later when their ARM reset and they were being foreclosed on. I’ve seen people take loans for ATVs, 15k of landspacing, 12 family member cruises, Escalades.

  29. Brett commented on May 6

    “It may be wishful thinking on my part but maybe the money isn’t being misused, just reallocated.
    To what? Any durable asset which is currently not in a bubble.”


    Whew!!! I was gonna post that “Sheesh! A lotta people’s sarcasam detectors sure seem to be broken” but then I read ur post and started to question if MY sarcasam meter was broken. If u REALLY were kidding, then WELL PLAYED! If u were serious then I concur with Mark. Please oh pretty please share wwith me/us where u think this mystical magical land of capital preservation lies cuz I can’t seem to scry on one a national scale let alone a global one. Guess that leaves me shorting the world. SOLD TO YOU!!!!

  30. David Merkel commented on May 6

    Having worked in the 401(k) market for years, I find it sad. Bullish? Bearish? Who can tell? The average American overconsumes, but doesn’t realize he is doing it because cash flow from borrowing temporarily hides the problem, and grows the problem.

    Many Americans living under financial stress adopt very short-term goals, and develop a pecking order of what they will keep, and at what cost. Fortunately (sort of, not) the system is overwhelmed at present, which provides a little more wiggle room, while structures for allocating the loss get designed (blundered into) in the judicial system.

    That said 401(k) investors in aggregate are contrary indicators. If they are taking out loans, it is probably not a good time to be doing so — they are forced to borrow, and that implies bad things for the economy as a whole.

  31. concerned commented on May 6

    I take it, like everything else, to be a long term bearish signal.

    In response, I am considering jumping into the QID ETF as a long term play, but I wanted to do a reality check with you folks … is this a reasonable use of that ETF ?

    I am scared to use futures because I don’t want to juggle bear rallies and fed-fighting with an expiration date looming … so the idea is I am going long the QID ETF, and if I am wrong for 6-12 months, it will be no problem as long as I am right in the end.

    Is this reasonable ? Or is there some erosion of capital or hidden downside with buying and holding, for the long term, these ultra short ETFs ?

    Also, any comments as to what would happen to these ultra short ETFs (QID) if there was an actual market panic – exchange closed, 20-30% drop – etc. Any possibility they would behave in unexpected fashion ?

  32. constantnormal commented on May 6


    I think that you can treat an ultrashort ETF (e.g., QID) just like a stock, one that just happens to move opposite the market. Remember that it moves twice as fast, so if you end up buying high and the market explodes upward, you will see it drop awfully quickly. But IF we eventually do see a collapse of this ridiculous euphoria (as would seem reasonable), it should serve as a decent hedge.

    In times like these, figuring out what is high and what is low can be awfully vexing, at least in the short term.

    But in a true panic, I suspect that these ETFs — especially those like QID that attempt to maintain a specific leverage vis-a-vis some other metric — will lag the vertical moves in the market quite noticeably, being lucky to maintain a 1.3:1 (just as an example) ratio, let alone the desired 2:1 ratio. I’ll bet that they simply won’t be able to keep up. But at least they’ll be moving in the right direction.

    And I would think it not beyond the realm of possibility that in a true panic, these kind of funds might collapse just from the inability to handle the vertical spikes in demand and the also vertical changes in supply. I recall back in 1987, I couldn’t get trade confirmations on stock sales for three days, from Merrill Lynch, of all people. I suspect, given the breakdown of systems in the frenzied trading that took place there, that they simply fabricated trade prices and created a stream of paper trades after the fact. No complaints, I got good prices (which is why I think they were phony). But I CAN tell you that it is more than a little disconcerting to not be able to confirm an execution on a market sale for 3 days! Nowadays the systems are much more robust, but as in everything, there are limits …

    Just my two cents worth.

  33. dd commented on May 6

    is a survey of 2k employees really representitive? I doubt it.

  34. Bud commented on May 6

    Looks like some consumers need to buy a copy of Rich Dad Poor Dad.

  35. concerned commented on May 6


    Thanks for your comments – much appreciated.

    I am curious about the notion that the ETF might not be able to “keep up” and would lag behind the targeted 2x movements (while still moving in the right direction).

    Is it not also possible that an uptick in demand for the ETF itself as a result of worsening markets would actually cause it to overshoot the 2x mark as asking prices for the ETF rose higher and higher ?

    Or conversely, is there not a situation in which a total collapse of market participants would cause there to be no buyers at any price for the ETF, causing its price to collapse as well – not due to the index it is tied to, but just due to plain old supply and demand ?

  36. Francis Hwang commented on May 6

    @concerned: Well, in theory the assets in a fund like QID are tied up in options, shorts, etc., that will actually gain value in a market collapse, meaning the price should naturally rise to some extent since the underlying assets have increased. That being said, market sentiment regarding the forward performance of the fund will distort the price in various ways.

    I’ve been in SDS for a few months; like QID it’s a double-inverse fund, though on the S&P 500. I’ve noticed it doesn’t quite track the S&P 500 to the magnitude I’d expect, but the general direction is always there. I don’t really like playing sentiment this way, so I’m constantly reviewing the position. I think if I had a lot more cash to play with, I’d rather do this by buying puts, but at my level the transaction costs for that would be ridiculous.

  37. me commented on May 6

    “I’m planning on raiding a 401(k) — just not my own.

    My plan hasn’t taken shape yet. The idea is still in its infancy.”

    Remember Jessie Jackson wanted to force 10% of 401ks to invest in the inner cities or something like that? Don’t’ give them any ideas.

    “is a survey of 2k employees really representitive? I doubt it.”

    Typically a survey of population of 1000 is statistically relevant, so 2000 gives a pretty accurate picture. A populations of less than 1000 is not reliable.

    Ignorance is bliss. I know people at IBM that are within a couple years of retirement and have no idea that IBM took away their paid health care in retirement and that the company makes retirees their own cost center (separate from active employees), caps what they will pay and passes the rest onto the retirees.

    To say they are clueless would be an understatement.

    They probably think they still have a pension to live on and don’t know ti stopped and froze Jan 1.

    This is very sad.

    And speaking of IBM, WTF is Palmisanno talking about today in the FT about “globally integrated enterprise”.

  38. Emmett commented on May 6

    I just checked with HR in my company.
    401K borrowing is down, not up.
    No significant pullback in contributions or reallocation beyond normal rebalancing.

    Everybody working extra hours to keep up.

  39. JW commented on May 6

    I happened to be one of them.
    The primary reasons for my move are:

    1) Pay off my morgage
    2) Limited options of 401K plan

    In essense,I am borrowing from myself instead of banks when I don’t know how I can invest my 401K money in current environment with limited and unattractive investment options.
    And I can invest the morgage payments which I would have to make to banks into more attractive investments like oil/gas/natural gas ETF and some international ETFs.

  40. Amy commented on May 6

    Interesting website/option…company that structures your 401k or IRA money to purchase primary residence without penalty!

  41. Web-O-Lies commented on May 6

    You know what’s truly shocking? The fact that there are so many idiots out there that are completely on-board with having the average tax-paying American family drain every single dollar of their savings account, their checking account, their 401ks, their kids 529 college plans, max-out credit cards, take loans out from grandma, and on and on and on… do what? To keep current on their mortgage payment to the bank! Are you out of your freaking minds?!

    So not only do they become increasingly poorer every single day by draining every damn penny they’ve ever saved in their lives, they also get that little cherry on top of having the mortgage they so struggle to pay, at the expense of every other aspect of their family’s lives, spiral down into oblivion in the most historic manner ever witnessed.

    Yeah, it’s a FABULOUS idea to insist the average tax-paying American family pay their mortgage on time instead of walking their asses away while they still have a few dollars left to feed their freaking family. If it’s good enough for banks and corporations to do on a daily basis, then it’s damn well good enough for the average tax-paying American family to do.

    The least expensive and least damaging solution to this is what evey single person knows in their heart has to happen, and all the “I’m better and smarter than you” crowd does not want to hear it. We must reduce every single persons mortgage by 25% across the board immediately! This means that those people who didn’t abuse the system are also given the principal reductions. Yes it is “rewarding” those who gamed the system, but what’s the alternative, the insane criminal cover-up crap that’s going on right now with the Fed, Treasury, Banks and Brokerages? This is the least damaging way to deal with this and every single one of you know it.

    Wake up and get over your self-rightous, holier-than-thou selves, and you know exactely who you are.

  42. James commented on May 6

    I am one of those who have recently borrowed from my 401k. I did so in order to pay off debt on whcih I was paying a high interest rate, reducing my monthly payments on the debt by two-thirds and giving me an exact date by which the debt will be gone entirely. The reduction in payments has allowed me to go ahead and bump my pre-tax contributions to my 401k.

    As long as I keep my job until I pay off the loan I feel I made the right decision. (Heck even if I loose my job I’ll have made the right decision, I’ll just be very bitchy about having to pay the penalties.)

  43. donna commented on May 6

    Well, for my friend in L.A, after his unemployment benefits ran out, he couldn’t even get food stamps because the 401K is counted as assets. He’s already burned through all his savings, lasting pretty well until now. So to even survive at this point, he has to withdraw from the 401K AND take the tax penalty. It’s a really stupid system. And later on people will bitch about paying his social security and medicare, no doubt. So really, what is the 50 something laid off worker supposed to do? He’s even getting turned down for warehouse labor jobs, so it isn’t like he hasn’t tried every option. Sad, really.

  44. ‘Emmerdeur commented on May 7

    I know a construction worker who works for a 4000 member Teamster local. He told me the union allowed the members to begin dipping into their annuities. it seems like a lot of construction guys are laid off in November and rehired by around March, but a lot of these guys this year have yet to be rehired as of May. So they are being allowed to dip into their retirement funds to keep themselves going.

    My acquaintance still has his job, but has had his overtime cut to zero, and now works a second job. Even with all this, and his wife working two jobs as well, he is still planning to dip into his own annuity shortly.

    Keep digging that hole!

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