Tuesday, June 10, 2014

Are you a part of this dangerous trend?

It wasn’t that many years ago that it seemed like every time you heard a radio advertisement it was about refinancing your home.  The idea, of course, was to get a lower interest rate and put your home equity to work.                                                                                                  

On many occasions in this column, I cautioned readers about the potential danger of this strategy.  I warned that using your home as a piggy bank for vacations, college savings and home remodeling could ultimately be a huge mistake. 
It wasn’t uncommon for people to refinance their home more than once, often putting as much as $10,000 or $20,000 in their pockets each time they did so.  After all, home values would continue to appreciate and you might as well get some benefit from your home equity.                                                              

By now, we all know how that strategy collapsed when home values plummeted during the recession of 2008.  Many homeowners found themselves upside down, meaning they owed more on their homes than they could ever possibly sell for in a depressed market.       Consequently, many families lost their homes when their paychecks were reduced or eliminated.  The recession was a difficult period for a lot of families.  And the problems were often exacerbated because of the large debt on the homeowners’ shoulders.              

So, for many, using their home as a piggybank was every bit as dangerous as I had warned.

Unfortunately, recent studies indicate that history is repeating itself, but with a slightly different flavor.  This time, instead of using their home equity as a piggy bank, studies are showing that far too many families are using their retirement savings.                                         

So, once again, I would like to put out the caution sign.

Pulling dollars out of your retirement nest egg today is just as risky as refinancing your home was a few years ago.  The long-term result is very likely to be a future financial disaster.

If you’ve read the rules of your retirement program, you’re aware that reaching the age of 59½ is significant.  With Individual Retirement Accounts, and 401(k) retirement programs, there’s a ten percent government penalty for withdrawals made prior to that magic age.

I was recently stunned by something I read in the well-respected Bloomberg News.  In 2011, the IRS collected an incredible $5.7 billion in penalties as a result of early withdrawals from 401(k) programs.     

Let me do the math for you.  That means $57 billion were taken out of retirement programs prior to the recipients’ retirement.  Clearly, the piggy bank mentality has moved from home equity to retirement programs.

As a financial advisor, I can’t emphasize enough that this strategy is dangerous.  Retirement programs are not intended to be piggy banks.

This trend is a major concern.  In an era when pensions are few and far between, and at a time when the current Social Security trustees express concern about the future of the program, people need to save more of their own money for retirement.

I’m pleased that a large segment of our population is setting dollars aside for retirement.  But I’m concerned that many are not keeping the dollars set aside for their retirement years.

This is an extremely dangerous trend and I strongly encourage my readers not to tap their retirement nest egg until they are truly retired.

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