People are saving more for retirement — but they’re still making one big mistake. Are you making the same one?

GySgt Wayne A. Ekblad — Thu, 30 Jul 2015 12:58:57 -0400

Retirement savers just crossed an important threshold.

For the first time, employers and employees contributed more than $10,000 on average to 401(k) accounts over the course of a year, according to a new report from Fidelity Investments. The milestone shows that both workers and their employers are contributing more to the savings vehicles.

Savings are growing as more people find work and feel better about the economy, says Jeanne Thompson, a vice president at Fidelity Investments. Workers who received raises would have saved more in their accounts, even if they didn’t bump up their contribution rates. And, some people may have gained access to retirement accounts after starting a new job.

Still, that boost in confidence is also contributing to a more troubling trend: 401(k) loans are getting bigger, too. The average loan was $9,720 at the end of June, up from $9,500 at the same time in 2014.

Now that the market has recovered and 401(k) balances are up, some people may feel more tempted to dip into their nest eggs, Thompson says. But the move could create multiple setbacks for their savings, she says. People who borrow against their 401(k)s need to pay the money back within a set period of time, typically five or 10 years. So if workers pay back the loans, their savings will eventually be re-invested. But by pulling the money out of the market temporarily, savers could reduce their long-term return investment growth, Thompson says.

Another factor: Some people paying back their loans may feel like they can no longer afford to save as much as they have been. Payments are often automatically deducted from workers’ paychecks, leaving them with less disposable income. Indeed, within five years of taking out a 401(k) loan, 40 percent of borrowers reduce their savings rate, Fidelity found.

Lastly, some people who change jobs may face a nasty surprise if they change jobs because many employers require workers to pay the loans back in full after they leave the company. People who don’t have the cash on hand might decide not to pay the loans back, which would require them to pay income taxes and a 10 percent early withdrawal penalty on the savings.

So before tapping into their savings accounts with a loan, workers should pause to think about how much this might undo all of their hard work. “They really need to think about ‘Can I afford this?'” Thompson says. “‘Am I going to be in this job for a long time?'”

http://www.washingtonpost.com/news/get-there/wp/2015/07/30/people-are-saving-more-for-retirement-but-theyre-still-making-one-big-mistake/?tid=hpModule_79c38dfc-8691-11e2-9d71-f0feafdd1394&hpid=z14

People are saving more for retirement — but they’re still making one big mistake

Retirement savers just crossed an important threshold. But let’s hold the confetti.

Response by CPT Private RallyPoint Member made Jul 30 at 2015 1:26 PM

CPT Private RallyPoint Member — Thu, 30 Jul 2015 13:26:12 -0400

Many people don't know how to save. Instant gratification seems to take over, They've been thinking about that swimming pool in the backyard, the motorcycle the've been thinking about since the signed up or the've been working so hard, they really want to go on a "nice" vacation. If the money in the 401K wasn't as easy to access (down payment on 1st house, family emergency and I forgot the third.)
401K is not a savings account, it is for retirement. Have another venue for savings.

Response by CAPT Kevin B. made Jul 30 at 2015 3:12 PM

CAPT Kevin B. — Thu, 30 Jul 2015 15:12:48 -0400

Glad to see the invest 10% piece as that is what I did for TSP on day one. The matching 5 made it 15%. Since I started that when I was 34 on the Civil Service side and ran it 27 years, it turned out to be around $800K when I rolled it over into commercial management at 59 1/2. There it started doing about 2-4% better than TSP options. Government or commercial annuities are not that large and you need to invest in TSP/401 so you can stop working and not take a pay cut. Most employers have no retirement; only a 401 contribution of their own. The time will come when you don't want to or can't work anymore. I'm in the "don't" category and am glad I just did it. So with a growth and burn down plan to age 70, it's a nice hunk of change.

Response by MAJ Ken Landgren made Jul 30 at 2015 3:45 PM

MAJ Ken Landgren — Thu, 30 Jul 2015 15:45:16 -0400

Investing in traditional 401k's is only smart as it reduced taxable income. So lets say you contribute $10,000 which you would have paid $2000 taxes if you had not contributed. That means the real cash flow is $8000 from you and $2000 in tax savings to reach $10,000 in contributions.