Posts
Both McCain and Obama suggested allowing people to remove money from their 401K without penalty for the next couple years. The idea is to help people meet their short-term obligations. Sadly, this is the identical mindset that created the financial crisis to begin with. It is the product of short-term thinking. The long-term never enters the thought process.
Taking money out of one's 401K is the dumbest thing you can do. I know this since I did it a number of years ago. This cost me substantially over the last few years. Here is the scenario.
I had the opportunity to invest in a property. I hit up my 401K to finance part of the acquisition. This enabled me to get the property upon which I was going to build my real estate empire. Of course, an interesting occurrence called the collapse in the housing market altered those plans. I ended up losing the house.
Let's look at what I did to myself. The money in my 401K was put there tax free. It was pre-tax dollars. After I took it out, since it was a loan to myself, I repaid it with after-tax dollars. When I reach the age of 59 1/2 (or whenever I take it out), I will be taxed on it again. Thus, I pay tax twice on the same money.
Another thing occurred during that time period; the stock market shot up. The money that remained in my fund realized an average 24% annual return for a number of years. I missed this opportunity with the greater portion of my funds since they were removed. Therefore, my opporunity cost was substantial.
This example should show why the proposal of the candidates is stupid. However, there is one other point I want to make. People who take the money out of their 401K to meet short-term needs might alleviate the problem today. However, the odds are they will be in the same situation in the future. Also, when they finally do reach retirement age, I would guess the money will not be replaced. They will need a "bailout" at that time.
Remember this the next time you hear someone suggesting taking money from your retirement fund. It is a dumb move and I have the scars to prove it. Learn from my mistake.
Share and Enjoy!
