Taking Money Out Of The 401K

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.
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There Is A Silver Lining

We all heard that the world is coming to an end; at least that is the impression we get economically. Each day the market slides another couple hundred points. This means that millions of people's retirement accounts are being washed away. Bank failures are surely to follow since the actions of the government are having little effect. Overall, it sucks right now.

But does it really? It is true that the circumstances are difficult on many fronts. However, of all that is going on, what is really within your control? How much has your life changed? If you are one who is seeking to retire soon or lost your job, this is certainly a tough situation. Yet, for most of us, what is the real impact on our daily affairs? When one really considers it, there is little that changed.

Let us look at housing. The odds are great that your home is worth less than it was a year ago. Most people are facing this reality. The housing market is in terrible shape with sales at historic lows. Nevertheless, this is not a problem for most since they are not looking to sell at the moment. Only those who are trying to move a house are feeling the change in the market. Those who are making their mortgage payments each month realize little difference.

The same is true for the retirement accounts. It is horrible to see people lose trillions of dollars over the course of a year. Yet again, unless you are at retirement age, you are not affected by this. A person who is 40 cannot touch a retirement account until the age of 59. Therefore, the downturn is an advantage to those who put in a portion of each check. Your regular contribution will now buy more shares than it did just a few weeks ago. This is to your benefit. Sure, it looks awful on paper when you compare it to where it was. However, try to view it in terms of the number of shares that you have. This viewpoint allows you to see how your account is actually expanding.

Markets recover with time. It might take a decade but it will come back. Focusing upon this does little to solve our situation. These are things which we have no control over. We are better served to concentrate on those factors we can affect. Each day, we are confronted with a choice: sulk about how bad things are or make the most of the day. Attending to those situations which have an immediate impact upon our lives is what helps us overcome the macro circumstances.

With each dark cloud there is a silver lining. This sounds like a bunch of garbage to many. Yet the above example about the retirement fund shows how our outlook dictates our success. Most choose to focus upon the issues which have little immediate impact on their lives.

Over the past few months, my retirement fund is down over 40%. Nevertheless, my fund is growing every couple of weeks when I contribute. The dollar value shrunk but my shares increase. Also, this horrible economic news is leading to a worldwide recession. Because of this, the price of oil plunged from all-time highs. This led to a reduction in the price I pay for gasoline. The fact that a gallon of fuel is now 75 cents cheaper impacts me more than a failed bank in the Midwest. This is the silver lining in all of this.

Why do I mention all of this? The reason is because it is easy to fall into the "Chicken Little Syndrome". Things are tough, there is no question about that. Yet there are opportunities available if you are of the frame of mind to take advantage of them. Looking at the current circumstances differently is the starting point for this. There is a silver lining if you are willing to look for it.
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