Middle-Income Earners More Likely to Borrow from Their Retirement Savings Than Any Other Financial Group!
How one handles their 401(k) during retirements greatly depends on the amount of money you earned during the years that you worked.
For example, if you happened to be a middle-income earner, making about $40,000 to $85,000 every year, then it’s highly likely that you will access a loan either from the retirement plan from your workplace, or from your 401(k).
This is as per research conducted by the Asset Management arm of J.P. Morgan
Additionally, individuals that find themselves in this category are more likely to request a loan as compared to those that are in a lower income bracket; that is, individuals that earn below $40,000, as well as high-income earners, those who make above $85,000.
The research also discovered that one of the reasons for this trend is that low-income earners are less interested in retirement plans. On the other end of the spectrum, the high-income earners are less likely to take a retirement loan because chances are high that they don’t need the money.
The Prevalence of Borrowing with Middle-Income Earners
According to the global head of retirement solutions at J.P. Morgan Asset Management, Anne Lester, the increase in middle-income earners borrowing could be a major sign of financial issues and stress.
Interestingly, she believes that even the households that are making as much as $200,000 in terms of annual income, could be living paycheck to paycheck.
Additionally, some of these middle-income earners have significant balances when it comes to analyzing their retirement plans. That being the case, they do not have the financial stability that would give them the reprieve of tapping into these funds.
Moreover, vital information that J.P. Morgan revealed from the research is that some workers are way below the 10 percent target savings rate when it comes to their retirement plans.
Indeed, the option to make withdrawals from the accounts of their retirement plans often results in massive financial insecurity and distress down the road.
Additionally, a recent study carried out by Dream Forward, found out that comprehending one’s withdrawal options is one of the major issues that confuse many a retirement account holders.
What to Understand Before Borrowing
Financial professionals advise that simply because one has the ability to derive money from their 401(k), does not mean that they should be able to.
Nevertheless, some of the reasons that can prompt an individual to take out money from their retirement account can vary from emergency cash requirements to simply making a down-payment for their mortgage.
According to the chief executive and founder of Curtis Financial Planning, Cathy Curtis, he finds that most individuals that have 401(k) loans normally have a massive issue with their cash flow.
Some of these issues can range from under-earning to overspending and there are often other issues such as poor financial habits as well as credit card debt.
Indeed, individuals looking to derive a loan from their retirement plan will have to analyze such issues and register the consequences of their actions.
As a matter of fact, an individual has the ability to borrow roughly 50 percent of the balance that they have in their account as per the federal law.
Thereafter, an individual will have five years to complete the loan payments.
Additionally, the loans have to be paid back not forgetting interest.
A Massive Financial Risk
At the same time, you will be selling yourself short in terms of any potential gains when it comes to investments that you would have been able to make if the money had stayed in your account.
According to Alliant Retirement Consulting senior vice president Aaron Pottichen, he believes it is tantamount to robbing oneself of money in the future if an individual takes the loan.
Additionally, things can go from bad to worse for you if you lose your job or leave your employer. In such a situation, you will be prompted to pay back the loan much sooner than you had anticipated.
As a matter of fact, you will have until the time that you file your taxes to complete making the loan payments.
Before this year, the rule was that an individual normally had 60 days to make the payments else face penalties.
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