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
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.
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?
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.”