Many of us have tried to save and plan for retirement. We’ve read the books about how investing in mutual funds is one of the best ways to maximize your return and grow your nest egg over the long term. We’ve followed that advice, and many of us have stayed the course, through up years and down, trusting in the historical fact that the stock market will produce long-term gains that outstrip every other investment vehicle.
As I sit here tonight, amazed that President Obama and congressional leaders have taken us to the brink of apparent default, I wonder: If the debt ceiling is not increased, if the United States defaults, and if ratings agencies downgrade the investment value of United States government securities — with the likely negative ripple effect of those developments throughout the economy — does anyone doubt that the stock market will plunge and our carefully considered long-term investments are going to take a huge, unnecessary hit? And if that inevitable hit occurs, how long will it take for our retirement funds to recover from it — if ever?
I think the dumb brinksmanship we are seeing from every one of our political leaders right now is infuriating, but I cannot imagine how angered I would feel if I were on the eve of retirement and saw those leaders taking absurd risks with the value of my hard-earned, soon-to-be-needed retirement nest egg. It’s one thing to believe that our elected representatives are unconcerned about the average schmoe, it’s quite another to see that they are gambling with your money and your future solely to further their partisan political positions.
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CNN has a story about hardship withdrawals from 401(k) plans reaching the highest level in 10 years during the second quarter of 2010. Fidelity Investments, which manages $844 billion in retirement funds, disclosed that, as of the second quarter, 2.2% of 401(k) participants had made hardship withdrawals over the past 12 months.
I’m not sure how many inferences you can draw from a rise in hardship withdrawals, but the increase clearly is not good news. Anyone who takes a hardship withdrawal is not simply raiding their retirement fund and thereby decreasing their retirement security. Hardship withdrawals also come an an enormous price — by some accounts, up to 40 percent of the amount withdrawn — because federal and state taxes are levied on the amount and a 10 percent penalty is imposed as well. If you assume that people tend to behave rationally when it comes to their finances, then you have to conclude that anyone who would take a hardship withdrawal from their 401(k) plan must be desperate and have no other options.
One of the individuals quoted in the article linked above noted that 2.2% is a relatively small percentage and that the vast majority of 401(k) participants therefore are not taking hardship withdrawals. That is of course true, but it also is likely true that people who have 401(k) plans with sufficient funds to be the subject of hardship withdrawals are the most prudent, careful savers. (Although it is not clear how many people have saved for retirement, recent surveys indicate that 27 percent of Americans have saved less than $1,000 and less than half of Americans have more than $25,000 saved to fund their retirement years. If you have less than $1,000, you probably aren’t going to take a hardship withdrawal because, even if you withdrew your entire fund, the amount left for you to use after taxes and penalties would be negligible.)
If even the most careful savers are so desperate that they need to take hardship withdrawals, rather than reducing their annual contributions or taking a loan from their saved amount, it indicates that times are tough, indeed.
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Posted in America, Politics, The Economy, tagged 401(k) Plans, America, Banks, Ben Bernanke, economy, Main Street, Politics, President Obama, United States Senate, Wall Street on January 23, 2010 |
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In the wake of the Massachusetts special election loss, President Obama has struck a more populist tune. He and his supporters have been talking about “getting our money back” from “fat-cat bankers” on Wall Street who took TARP money. Siding with “Main Street” rather than “Wall Street” is a time-honored theme in American politics.
I wonder whether the “Wall Street vs. Main Street” pitch still has resonance, however. The reality is that many working Americans have 401(k) plans or some other form of retirement savings or pension plan that is invested in stocks and bonds. According to the Investment Company Institute website, in 2008 49.8 million Americans had 401(k) plans that held an estimated $2.4 trillion in assets. In short, lots of American families are invested with Wall Street. They watch the Dow and the S&P 500 and hope that their 401(k) plans will appreciate in value and allow them to retire earlier and wealthier.
As a result, in the 1930s or 1950s there may have been a bright-line distinction between “Main Street” and “Wall Street,” but that bright-line exists no longer. People may be upset by the size of the bonuses paid by banks that took TARP money, but I think many Americans not only aren’t reflexively opposed to Wall Street bankers, they hope that those investment bankers do their jobs well and create wealth that their 401(k) plans will share in.
If I am right in that perception, then politicians who want to rip into Wall Street should proceed with extreme caution. In the last few days, the stock market has fallen at the same time President Obama has attacked Wall Street bankers and Senators have declared they won’t vote for a second term for Federal Reserve Chairman Ben Bernanke. It may be coincidence, but it may cause many Americans to wonder why the President and the Senate seem to be playing politics with their retirement funds.
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