(Bloomberg Business) — People saving for retirement are often told they should never, ever touch the money in their 401(k)s. They’re not listening.
Americans prematurely take at least $57 billion per year out of their retirement plans, Bloomberg News calculated last year. In the process, they’re paying early withdrawal penalties of 10 percent, while also robbing themselves of decades of investment gains and future income in old age.
To stop the bleed of assets, a group of retirement experts have come up with a counterintuitive strategy: Make it easier to borrow from retirement accounts.
Of course it would be best if retirement money just weren’t touched at all. But, when people lose their job or face another emergency, many have no choice but to tap their savings. More than a third of workers cash out 401(k)s when a job ends, for example, withdrawing an average of $15,206. “Sometimes the only money available is your 401(k) money,” says financial planner Stephen Lovell.
Pulling money from a 401(k) means it’s lost forever from your retirement. Loans, however, are generally paid back, the ERISA Advisory Council says in a report to the Department of Labor that went public in late January. One exception: People do tend to default on 401(k) loans when they lose their jobs. Most employers require 401(k) loans be paid back within 60 days of leaving the company.