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
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.