Trent Charlton knew the risks when he borrowed $10,000 from his 401(k) and cut his retirement savings in half.
But Charlton, a 40-year-old account executive at an Irvine, Calif., trucking company, said he had little choice because he and his wife could not keep up with monthly expenses after American Express reduced the limits on three credit cards.
As home prices fall and banks tighten lending standards, more people are doing the same thing: raiding their retirement savings just to get by and spending their nest eggs to gas up sport utility vehicles, pay mortgages or put food on the table.
But dipping into 401(k) accounts can carry risks because defaulted loans and hardship withdrawals are taxed as income and are subject to a 10 percent penalty if the worker is younger than 59 1/2. That means if the trend grows, many Americans will risk coming up short on retirement savings or may have to rely on an overburdened Social Security system.
“People who take out a loan or withdrawal are adding to a looming retirement crisis over the next 30 to 40 years,” said Eric Levy, a partner at global consulting firm Mercer. “And what implications will that have (for) our economy?”
Some of the nation’s largest retirement-plan administrators, such as Great-West Retirement Services and Fidelity Investments, are seeing double-digit spikes in hardship withdrawals and increases in loan requests, a sharp departure from levels that traditionally varied little.
Administrators say consumers are using retirement savings to pay for unmanageable mortgages, maxed-out credit cards and costly utilities and groceries.
