The topic of borrowing from one’s 401(k) account is always a bit controversial. Regardless of your view, the folks at TIAA-CREF have compiled some interesting data on 401(k) loans.
Key findings about 401(k) loans
In their study of 401(k) loans TIAA-CREF found:
- Getting Out of Debt – Paying off debt was cited as the top reason for taking out a loan from retirement plan savings (46 percent), yet only 26 percent of respondents said it was a good reason to take out a loan.
- Paying for the Unexpected – The No. 2 reason overall for taking a loan was to pay for an emergency expenditure (35 percent).
- Borrowing Against Their Savings – Nearly half (47 percent) of those who have taken out a loan from their retirement plan savings borrowed more than 20 percent of their savings, with 9 percent of respondents borrowing more than 50 percent.
Moreover, they found that nearly One-Third of Americans Have Taken Out A Loan From Their Retirement Plan Savings and that 43 percent of those who have taken loans have taken two or more.
401(k) loans – some statistics
The TIAA-CREF study offered some interesting numbers regarding 401(k) loans:
“Women were more likely than men (52 percent vs. 41 percent) to take out a loan to pay off debt; however, men were more likely (40 percent vs. 29 percent) to take out a loan to pay for an emergency expenditure.
Nearly half (47 percent) of those who have taken out a loan from their retirement plan savings borrowed more than 20 percent of their savings, with 9 percent of respondents borrowing more than 50 percent.
In addition to borrowing funds from retirement savings plans, many Americans are also contributing less to their plans while they are paying back the loan. More than half of respondents (57 percent) who took out loans decreased their contribution rate during the payback period. Those age 18-34 were the most likely to decrease their contribution amount (81 percent). Forty-eight percent of women kept the same contribution rate while paying back the loan, compared to only 39 percent of men.”
Questions to ask before taking a 401(k) loan
Morningstar’s director of personal finance Christine Benz recently wrote an excellent piece 4 Key Questions to Ask When Considering a 401(k) Loan. Christine suggested answering these four questions before deciding to take a loan from your 401(k) account:
- Does my intended use of funds promise a higher rate of return than leaving the money be?
- Is my job secure?
- Can I realistically pay this back?
- Is my retirement plan on track?
Is a 401(k) loan right for you?
I’m generally not a fan of using your 401(k) as a piggy bank but the reality is that there can be situations where the money is needed. Things like a medical situation, a job loss, or other dire situations might necessitate a 401(k) loan.
In the words of TIAA-CREF Executive Vice President Teresa Hassara:
“Too many people have struggled since the 2008 financial crisis and have looked at loans from their retirement plans as a way to ease financial stress. However, individuals should weigh all of their options carefully before borrowing from their plan savings or reducing their contributions. Loans can undermine retirement savings and cause investors to miss out on earnings from rising markets. It’s important to evaluate the benefits of taking a loan now against the need for those earnings to build long-term retirement security. Working with a financial advisor can help people make the best decision for their life stage and retirement goals.”
I couldn’t agree more. Make sure you consider all factors in your financial situation before going the 401(k) loan route.
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