Big Boomer Mistake: Dipping Into Retirement Savings

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“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.

Another cause is termination of employment, says Steven M. Kluever, senior vice president-product management and investment management at Jackson National Life distributors in Denver. If a worker receives no severance pay and/or does not have sufficient funds to cover the period of transition to a new job, the person may have to dip in to make ends meet, he says.

Carpenter thinks a chief problem is that boomers lack a specific retirement goalsay, for the amount needed to retire the way they want. “The average boomer does not have a figure in mind, and when they find out, their eyeballs pop. They feel defeated, so they just go on living for today and getting further in the hole.”

Lack of information creates confusion, he says. For example, one client worried he was saving too much. Floored, Carpenter asked the reason. It turns out that some friends had told the client that he was saving “way more” than they were, so the man thought he might be on the wrong track. (Carpenter reminded the man of his retirement goal and how cutting back or dipping in would affect it. “I also reminded him what the worst case would be if he sticks to his plan: He could retire early.”)

Douglas R. Conoway, president and managing principal of Wealth Management Group, a Rochester, N.Y., registered investment advisor, says he has not seen a lot of 401(k) loans lately, but “consistently, Ive seen a lot of boomers who arent saving enough for retirement.

“It seems the more money they have, the more wasteful they become.” The dipping in problem is a spending issue, not a retirement issue, Conoway contends. He lays blame on boomers not making the time or effort to examine what is important and meaningful in their lives.

This realization has spurred him to take financial planning deeply into client values. “We dont ask about things and stuff. We ask what makes them happy, what they want to do and what is meaningful. Then, we make that work.” The process helps curb purposeless spending and motivates money management around goals, he says.

Example: One couple came to Conoway with a $250,000 a year income but a negative net worth, no retirement savings and no financial concept other than “spend, spend, spend.” He says he worked with them to identify life goals and values and then to design a financial plan around what they felt was meaningful, including retirement savings but also including such things as signing up for a golf outing and an art class.

Significantly, Conoway adds, neither had spoken to a financial planner before then.

OppenheimerFunds believes contacts with financial advisors play a key role in helping boomers find other alternatives to dipping in to retirement accounts, says Schoenfeld. Her firm has developed consumer and advisor educational materials to help support retirement discussions, and it also offers an asset allocation service, Portfolio Builder, for advisors for use with clients in retirement savings planning.

Advisors need to talk seriously about the consequences of taking debt into retirement as well as about living longer in retirement and inflations impact, she stresses. As for dipping in, they need to help clients set up specific goals, perhaps establishing separate accounts for each, she says. This is feasible, Schoenfeld notes, because various products exist today that can help people meet many goalse.g., a 401(k) for retirement, a liquid account for a mortgage down payment, a 529 plan for college savings, etc.

At the very least, says Carpenter, advisors can help boomers set up a rainy day emergency fundto be tapped instead of the retirement savings.

Advisors also can guide boomers into doing things automatically, such as rebalancing and investing in life cycle funds, notes Greenwald. And employers can work with plan providers to educate workers on retirement income planning, he says.

Some reps are using 72(t) distributions to help clients bridge between jobs, says Kluever. These allow penalty-free, early withdrawals from qualified retirement accounts, with the money taxed as it comes out. Negative tax consequences might occur if a person later shuts off the distributions, he cautions. Still, an advisor can use the arrangement to help someone in dire straits, he says.

Some advisors dont want to work with boomers who are just starting to save, Carpenter says, citing time and education involvement as reasons. But this work can be rewarding, he says, if the boomer is committed to trying.


Reproduced from National Underwriter Edition, April 15, 2005. Copyright 2005 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.