Big Boomer Mistake: Dipping Into Retirement Savings
“Dipping in” is what Joseph Carpenter calls “the big mistake” that many boomers make in their retirement planning.
Dipping in refers to making withdrawals or loans from retirement savings accounts to pay for current expenses, buy a new car, pay for a vacation, or cover other costs.
Boomers often justify the action, Carpenter says. “Theyll say, I only took out a chunk, say, $20,000 or $30,000. They think it will somehow replenish itself.” The problem is, they dont know how to replenish it, and “sometimes the amount they take out is so large that it pushes the boomer into next tax bracket.
“Worse, most dont realize what theyve done until after the factsay, when they visit with a financial advisor and learn about the huge tax bite. Then, they say, oh, my gosh, I didnt know that.”
How pervasive is the problem? A study just published by OppenheimerFunds Inc., New York, N.Y., found that 15% of non-retirees had admitted to dipping in. “We think that is relatively high,” says Ellen Schoenfeld, vice president and director of educational initiatives at the asset manager.
Conducted in the fall of 2004 by Mathew Greenwald & Associates, Washington, D.C., the OppenheimerFunds study sampled views of Americans, age 45-75, with household incomes of $75,000+ and investments of $300,000+ (excluding primary residence). Respondents included 600 workers and 401 retirees.
The study found 2 boomer demographics to be especially prone to dipping in. Specifically, 20% of “unrealistic optimists” (whom the firm describes as not yet prepared for retirement but still optimistic about having a comfortable retirement) and 28% of “pensive procrastinators” (who have not planned well and are worried about that) said they had dipped in.
What is the reason? They want to pay off debt, make home improvements, buy homes or take out second home loans, says Schoenfeld. “They seem unaware that they will lose the tax deferred compounding while the money is out of their retirement plan and that it will take a long time to make up for that.”
A financial advisor can use hypotheticals to show boomers the effect of loans and withdrawals on retirement funds, she notes. “However, a lot of those who dip in are not working with an advisor,” she says.
The problem is further compounded by the fact that many boomers “dont have investing skills or any knowledge about the most effective vehicles to use for retirement accumulation and distribution,” says Mathew Greenwald, president of Mathew Greenwald and Associates. “They focus on the now; they have no savings goals; and they cant understand the consequences of their actions.”
That amazes Greenwald. “People know what to eat, and they know what happens when they stray from a proper diet,” he says. “But many boomers dont have a standard for financial security in retirement. So, by dipping into their 401(k)s and other retirement plans, they are unknowingly trading off their future security.”
Worse, he says, “the penalties people must pay for early withdrawal and the interest they must pay on loans are not effective in preventing the leakage.”
As for retirement funds that some may have set aside in personal saving accounts, Greenwald throws up his hands. “There are no barriers at all” in those accounts that will stop people from dipping in, he says.