Bad Economy?  Try Not to Dip into Retirement Funds

Suzanna De Baca -- Expert Business Source, 5/19/2008 7:06:00 AM

With the economy still slumping, many Americans are reportedly tapping their retirement accounts in order to make ends meet.  While this may help in the short term, using retirement funds now can create greater financial problems in the future.

With sky-high gas prices, rising food costs and an economy that continues to slump, many Americans are cutting back on expenses. Unfortunately, news reports indicate that numerous consumers are also tapping their retirement accounts in order to make ends meet.  While this may help in the short term, using retirement funds now can create greater financial problems in the future.

“The economic downturn is hitting roughly one in 10 middle-aged and older Americans especially hard, compelling them to borrow money for everyday living expenses and to seek help from family, friends or charities, according to a survey released Tuesday by the AARP,” says a May 13, 2008 AP Online article entitled  “Americans 45 and older say they're cutting back on investing, dipping into retirement accounts” by Ellen Simon.

The article continues, “One-third of survey participants said they stopped putting money into their 401(k) or retirement account.”

Think carefully before tapping into retirement accounts.

In crisis times, individuals and families have to make tough decisions.  Reducing spending can be difficult when there is little room for cost cutting.  However, spending retirement funds or stopping even the most minimal contributions should only be done after careful consideration.

Withdrawing money from retirement funds, such as 401(k)s, may be more expensive than you think.  There is a penalty for withdrawals before age 59 1/2.  If you have a company match and you’re foregoing making contributions, you’re essentially giving up additional compensation from your employer.  While that doesn’t necessarily help pay the bills now, it can make a significant difference in how much money you can accumulate on a tax-deferred basis for your retirement.

Consider all alternatives

Your 401(k) or other employee sponsored retirement plan is your future security.  If history is any indication, this economy will eventually recover.  If you can make ends meet without tapping into your retirement account, you’ll be better off in the long run. Consider all your options before compromising your future financial health.

Suzanna de Baca is president of Private Capital Solutions Group. Securities offered through Broker Dealer Financial Services Corp. Member FINRA & SIPC. Investment Advisor Representative of Investment Advisors Corp., A Registered Investment Advisor. Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal or investment advice. Although the information has been gathered from sources believed reliable, please note that individual situations can vary, therefore the information should be relied upon when coordinated with individual professional advice.