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Why Your Kids Are Bad for Your 401(k)

Borrowing from your employer's retirement plan can be habit-forming — particularly for Americans in their 40s and 50s

By Anne Tergesen | MarketWatch | October 11, 2013

Are kids cutting into their parents' retirement savings?

That’s the conclusion Fidelity Investments drew when it examined the accounts of 180,000 people who participated over the past 12 years in one of the employer-sponsored 401(k) plans it administers.

Among this group, two-thirds of those who took out 401(k) loans are what’s known as serial borrowers — workers who borrowed money from their retirement funds more than once over that time period, Fidelity said when it first released its findings in August.
 
Dipping Into 401(k)s for College

Now, Fidelity is reporting who, exactly, the serial borrowers are.

On average, they’re middle-aged parents struggling to finance college for their children. "Once people hit their 40s, we see a big spike in the number of loans taken out in the third quarter" — when college tuition bills are due, says Jeanne Thompson, vice president for market insights at Fidelity.
 
"For many, the 401(k) is the biggest pot of money they have," she says.

According to Fidelity, nearly 65 percent of serial borrowers are between ages 40 and 60. Families with children are more likely to dip into their 401(k) accounts multiple times.

(MORE: Maybe You Shouldn't Invest in a 401(k) After All)

While 13 percent of the childless couples in Fidelity's sample have more than one loan outstanding, the same is true of 18 percent of parents with one child, 22 percent with two children, 21 percent with three children, 35 percent with four children and 39 percent with five or more kids.

Moreover, serial borrowing peaks when the oldest child is between 18 and 23 — or the age associated with college attendance.
 
Serious Damage to Nest Eggs

While 401(k) loans are a cheap and easy source of credit compared with credit cards and personal loans, Fidelity calculates that those with multiple loans can do serious damage to their nest eggs over the long-run, even if they repay the loans.

Someone who earns $40,000 and receives 4 percent annual raises but takes five loans will amass $298,300 in their 401(k) account after 40 years, calculates Fidelity, assuming a 7 percent annual rate of return and a 6 percent employee contribution rate. That’s 27 percent less than the $405,740 the same person would have had with no loans.

Why the gap?

(MORE: Student Loans Are Threatening Older Americans' Ability to Retire)

Those who take out loans reduce their savings rates when repaying their loans. On average, they save two percentage points less of their income over five or more years, says Fidelity.

For those in their 40s and 50s, the timing of these loans couldn’t be worse. “By the time you are done repaying them, you’re heading into retirement,” says Thompson.

Serial borrowers, she adds, “are not treating the 401(k) as a long-term savings vehicle.” By dipping into their savings multiple times, she adds, “they are thinking of it more like a savings account.”

Anne Tergesen is a staff reporter at The Wall Street Journal, covering retirement finances and planning. This article originally appeared on MarketWatch.com

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