03 August 2010

The 401K Loan-

Oops, I did it again, (and I ain't even blonde).
A little over three years ago I took a loan on my 401K. Have you ever considered borrowing money from yourself?
At that time the important factors for me were-

The negative:
If I lost my job, I'd have to pay the loan back in its entirety.
The money you borrow is deducted from the working part of your 401k... and won't be earning interest.
If you are under age 59-1/2, and don't pay the loan back, you'll have to pay a penalty on the unpaid portion. (Not a factor for me.)

The positive:
At the time, the loan rate I'd be repaying myself was 9.25 percent, and that rate was higher than the market was paying, but still lower than the interest I was paying on the other bills... Win/win.

I repaid the loan over three years and was paying myself that 9.25 percent interest while most of my other investments were earning a negative return.

Now that the loan is repaid, I'm gonna do it again, but for slightly different reasons:
The loan rate this time is only 7.25%.
Using this money to pay off other bills I'll be virtually debt-free. The debts I'm paying off are charging me much more than 7.25%, so again this is a win/win.

We've seen that our Federal government has put out a "Notice of proposed rulemaking" signaling they may abscond with our retirement funds and give us a "guaranteed income" account in return, (like the WILDLY successful Social Security Insurance program).
If they decide to steal my money, there will be less to steal since I took the loan.

The seven and-a-quarter percent I'll be repaying my own retirement account is still a LOT more than that money is making in the market right now.

Only time will tell if this is actually a good move. But right now I think the upside of taking the loan FAR EXCEEDS the downside.
Watch with me over the next three years and see.


the golden horse said...

We did the same, did the loan thingy. I think soon, all savings are going to be gone. They are salivating to get to our retirement funds.

Radio Patriot said...

I borrowed against my 401K in 1993 to buy a new car -- allowing myself to pay cash. Over the next three years I paid myself back, and it all worked out.

Since 2007, I've semi retired and began drawing monthly from my 401K. My relatively conservative investments were such that I never dipped into the principal. The nest egg was earning enough to skim from the top.

However, my broker called me last week with some scary news -- the earnings had dropped off to the point where we had to liquidate one of my holdings in order to maintain a cash position that would cover my monthly "distribution" or draw.

A sign of what's to come.Now here's the dilemma: even if holding cash, you're not guaranteed to be ahead of the game. Inflation/deflation is a virtual certainty. What will today's cash be worth tomorrow, or next year?

Is it wiser to use the cash now at its present value to pay off everything and secure your future? Or leave it in the investment portfolio and hope its a hedge against the storms ahead?

Any ideas?

Greybeard said...

I had considered retiring a year ago Andrea, and didn't do it because I didn't want to lock myself into depending on "Fixed income" in any way. (Social Security). My thoughts were that if inflation takes off, as many of us suspect it MUST... soon, it'd be better to still be in the workforce so my income would hopefully be adjustable to cover that inflation.
Seems to me having your money invested in stocks is the only chance you'll have to keep up with inflation. I'd be discussing that with my financial adviser and others. The big question is- if we leave the money in a 401K or IRA will it end up in a Federal "Guaranteed Income" account?

I'm keeping my ears open, and if this "notice of proposed rulemaking" becomes law I'll be withdrawing all my 401K/IRA money and investing it myself.

Scary times indeed.