A story by Linda Koco in last week’s issue drew attention to a situation that probably has reached epidemic proportions but has received relatively little attention. That situation is one where pre-retiree boomers “dip into” their retirement savings, particularly 401(k)s, but also IRAs.
Considering the generally miserable state of retirement saving among a big chunk of the pre-retiree population, anything that subtracts from what they have already put aside is dangerous and should be viewed as such.
But, in fact, advisors say, many people who dip in seem to be oblivious to just how toxic the effects can be. This is especially so when the dippers are hit with the double whammy of not only having higher taxable income in the year they dip in, but also a lower retirement savings base going forward, which many find painful or impossible to replenish.
Needless to say, the dippers are expert at rationalizing just how important are the reasons for their needing to extract money from retirement plans. The house, the kids, the mounting credit card debt…the list goes on and on. All of these, however, are expenses that are current and should be treated and paid for as such.
The attitude of the dippers seems to be: Isn’t it wonderful that we can choose to live (and spend it up) in the present while the future is taking care of itself?
Unfortunately, no one has yet discovered a way to make the future take care of itself–it has the nasty habit of wanting to be taken care of. But this doesn’t stop a lot of people from acting as if the future was all sewn up and all they have to do is enjoy the present to the max.
Advisors have an important mission here–namely, to bring reality into the situation. Not to get biblical about it, but what advisors need to tell such clients is: Thou shalt dip no more. Or else.
In that spirit I’d like to re-offer a very useful checklist from Ellen Schoenfeld of OppenheimerFunds that accompanied Linda’s article and that gives some great ideas about what advisors can suggest when they have that fateful dipping-in discussion with their clients.