Creeping on your retirement.

 

I was checking my twitter stream yesterday when I stumbled on an article by my girl Sandy titled “I Bought A Rental Home With My 401K“. If you’re too lazy to click-through and read the article the gist is Sandy took out a $40,000 401K loan to pay cash on a $38,000 investment property (I didn’t know places that cheap existed…haha). If you want more details you’ll have to read the article.

Contrary to what you might be thinking, I’m not actually here to discuss Sandy’s situation. Instead I thought we could focus on the bigger picture and talk about borrowing from retirement in general. Would you do it? 

I’d be lying if I said the thought of pulling a little bit out of retirement hadn’t crossed my mind. I have a goal to reach $100,000 in savings before Girl Ninja and I buy a house. If I liquidated my Roth IRA (which I can do penalty free on my contributions) we’d be at that $100K threshold.

Maybe I’m stubborn, but when I put that money in to a retirement account, I put it in to a RETIREMENT account. Ya know, for when I retire. This is non-negotiable. Compound interest is a freakin’ miracle. The earlier I invest, the longer I have to let compound interest work to my favor. If I pulled all my money from my Roth IRA, or 401K, I’d lose out on five years of compound interest. The first five years. The most important five years. I ran the numbers, if I took $30,000 out of my Roth IRA today (and then resumed maxing out contributions until I was 65) I would lose $419,000 in earnings.

So yeah, an extra $30,000 would be sweet to have in the ol bank account. But an extra $419,000 in my retirement accounts sounds a heck of a lot better. 

For this Ninja, my retirement accounts are a one-way relationship for the next 40 years. I’ll be putting money in, but wont be taking any out. How about you? Would you borrow from your retirement accounts for a house? A new kitchen? Facebook stock?

24 thoughts on “Creeping on your retirement.

  1. Doesn’t it depend what you do with the money?

    Buying a long term asset could still be an investment for retirement… especially if there is no debt involved.

  2. About 20 years ago, I had to dip into my RSP to pay off back taxes… alot of back taxes… and I swore then and there that would be the last time I touched it for anything other than “First Time Homebuyers Plan” and my actual retirement. FTHB is a program in Canada where you can withdraw up to $25K from your RSP tax-free to go towards the purchase of your first home and you have 15 years to pay it back (when we bought our first home 8.5 yrs. ago, the max you could withdraw was $20K).

    No way will I touch my RSP before it’s time… retirement time… 22 years from now.

  3. I completely agree with you. As far as my wife and I are concerned, our retirement accounts are untouchable (unless a MAJOR NEGATIVE life change occurs). The whole point of retirement saving is to let compound interest work its magic!

  4. I wouldn’t take money from retirement for a “purchase” but we did just take $38k out to pay off our credit cards. We will pay it back in no more than 4 years, and save thousands in interest. Yes, we are losing out on the compound interest of the account, but once we are out of debt, our whole picture will dramatically change.

  5. In Canada you’re allowed to take out up to $25,000 from your RRSP for a down-payment on your first home. I’ll probably do that… but only because I have another pension through work that’s my “real” retirement fund 😉

    I think it depends what you buy with the money. If you’re buying an income-generating asset and are going to put the money back in your retirement accounts, I think it can make sense.

  6. There may be exceptions here and there, but on the whole I agree that retirement money is best kept for retirement. Besides compounding, inflation is unpredictable and inevitably changes must be made to the social security laws within a couple of decades – both of which put more responsibility on the individual saver/investor. It may be tempting in your 20s and 30s to think you could use the money now and that retirement is many decades away, but unless you pay back a 401(k) loan quickly you’re losing a lot of potential tax-deferred growth.

    BTW, check your link to “Sandy’s” article.

  7. Wow, running those numbers is crazy! I knew taking money out was impactful, but never thought it would mean losing *that* much in earnings. Retirement money is just that…it would have to be something pretty tragic for me to remove that money now.

    • P.S. When I clicked on the link for the article, it took me to a manteristing nail about manbreasts LOL

  8. I would only pull out amounts that would not cause a penalty if we were in a very bad place and had no alternative. Retirement funding is too important to me.

  9. My wife and I actually took a TSP loan for our down payment. Our rent was getting to be within a few hundred dollars a month of what a mortgage would be. Our commute was a shorter distance than where our new house is, but took 10-15 minutes longer (one-way) on average. We locked in at 3.75% on our mortgage, got into a neighborhood in December that is $30k+ out of our price range right now, and don’t regret it a bit.

    Yeah, the markets went up a bunch at the beginning of the year, but most of those gains would’ve pretty much been gone by now anyway. We set the TSP loan to pay off over 4 years…I’m only in my mid-20s, so I have time to build it back up. Would’ve been a different story if I was in my 40s.

  10. I read on twitter that she’s paying herself 4% interest on the loan — which means that she will still be benefitting from compound interest (although perhaps at a slightly lower rate). I don’t know if this is still allowed in Canada but, we were (are?) able to have self-directed RRSPs/401k which we can use to underwrite mortgages for ourselves. Say you had $200 000 in an RRSP and used the money to buy your house. The mortgage holder would be your RRSP and you could charge any rate you’d like (any market rate) on the loan. By doing so, not only do you not have to pay interest to the banks but, you are able to contribute more than the maximum (so to speak) via interest (ie, you contribute your $22 000 and then all the interest — the idea is that you choose the highest interest rate available — say 6%, which allows you to contribute an additional 12 000$ in mortgage interest. Obviously, this technique was more popular when interest rates were higher but it’s still an interesting alternative)

  11. I have a friend who makes about 20K a year and doesn’t have a lot of extra money. She wanted to buy a car, so instead of getting a loan – which she probably could have – she took the money out of retirement. She doesn’t see that any small interest rate she would have had to pay on a loan would be better than the huge dent she’s making in her retirement account. It’s hard to teach someone who doesn’t seem to want to know the difference. She is in her early 50’s and at the rate she is going, she’ll have to work well into her 70’s before she’s able to retire.

  12. I’d probably never take money out unless it would keep me from becoming homeless or dying.

    That said, I do have $1,000 in my Roth that I’ve thought about taking out to pay for a summer class I’m taking. Or I might just put it on my CC and pay it off over a few months (currently 0% interest).

  13. I didn’t know about some of the above options…

    …I would not pull out of my retirement unless a life circumstance forced me and I was in dire need of that money. I really don’t have that much in there but it is as you said lost time on it that adds up as well.

  14. You are making a lot of assumptions in this scenario, which I think are leading you to a misguided conclusion.

    My accountant told me not to invest in my Roth IRA and to save it for a house. When it came down to buy my house (I put 20% down – 40k at purchase time.)

    Once I had the house, I came to the conclusion I should have not used the Roth IRA at all and just put it toward the house. The 3 years I put into the Roth isnt worth much more than I invest, actually about 1k less. Not to mention I have a 401k which I put the max into and get 5% from my employeer and a pension.

    You already have a pension and a 401k…not investing into a Roth for a couple years isnt going to kill you.

    • That’s because you are looking at your Roth in a VERY short time frame. Three years is silly to consider the growth or decline in a Roth account. It’s a retirement account and really is for the long term. The historical average of the stock market beats any other investment, including real estate. Sounds like you made an emotional decision, not necessarily a bad one though.

      Would love to hear why you think my conclusion is misguided since history says otherwise. Care to offer up more insight?

  15. We will probably withdraw about $10k from my Roth 401k for an upcoming home purchase. We technically have the cash to make the down payment and meet the closing costs, but it would put a significant dent in our liquidity. We want to keep cash available for unforeseen expenses since we are first time home owners.

    We will be paying back the ‘loan’ at roughly 4% interest, which is only a little less than the 6% I’ve averaged since owning the account. And, I will not stop my contributions – so I’ll be paying back the loan while contributing what I already planned to contribute – so really its only a 2% penalty on the 10k for the few years I’m repaying the loan (though we have 15 years to pay it off, we will likely repay it in 2-3).

    If I had to stop my contributions in order to repay the loan, and had to take the full 15 years to pay it back, I would definitely not do it. But since it is only a short term issue, we can deal with losing the 2% difference.

  16. Looks like the property would return the ~40K within 5 years considering expenses and rental income. If rent never goes up, over a 40 year period, that rental property would bring in ~$392,000 in rental income + value of house + monthly income coming in…. That really sounds better than $419,000 – it just sounds like a different set of risks (and less diverse income stream).

    Alternatively, if you wanted to do something more extreme – like early retirement… Compound interest doesn’t matter as much since you wouldn’t have many years to compound.

  17. That is a question that will vary dnndpeieg on your personal financial information. For most, the Roth would probably be the best vehicle, because of the lower fee structure and the tax-free distributions available after age 59 and a half. However, there are situations in which the 403(b) is also an appropriate vehicle. That is a situation that you should talk to a personal financial advisor so that you can review your overall goals and financial situation and then make an informed decision. It also depends on what funds are available in each. If there are better-suited fund choices in the 403(b) portfolio, then perhaps maxing out the 401-k to the employer’s matching portion is good, then investing the rest into the 403(b) for a more suitable return.Many questions are fairly easy to answer here, but this one requires too much personal information to be given over the internet. Not good.

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