Every year, more and more Americans do it. The consequences could be harsh, but they’re willing to take the risk. Should you join them?
We’re talking, of course, about borrowing from your 401(k).
According to a new survey by Fidelity Investments, nearly one million people took out 401(k) loans in the last year. That translates to 22.5% of Fidelity’s 401(k) investors, compared to just 18.7% in 2000.
So what’s the big deal? They’ll pay it back as soon as they’re able, and get right back to building their nest egg—right?
Not exactly. The survey also found that 40% of borrowers reduce their savings rate (presumably while trying to pay back the loan), and more than a third stop contributing to their retirement fund completely within five years of withdrawing the money.
What’s more, as many as half of those people—who Fidelity refers to as “serial borrowers”—end up taking out yet another loan.
While the reasons for borrowing range from paying everyday bills to paying down student loans, a growing number of investors are taking out money specifically to buy a home. The survey found that, in just the last year, more than 27,000 investors took out an average of $23,500 to purchase a home, with Millennials more likely to do so than any other age group.
To illustrate the effects of borrowing from your retirement fund (and subsequently cutting the amount you save), Fidelity ran an analysis of three hypothetical investors. Someone who reduces his savings rate from 10% to 5% for five years will receive almost $200 less each month in retirement. As for an investor who reduces from 10% to 0% for 10 years? He’ll have about $700 less each month than the third investor, who maintains a savings rate of 10% for 10 years.
But if you’re still considering taking out a 401(k) loan, make sure you’ll be at your current gig long enough to pay it back promptly, Jeanne Thompson, vice president of thought leadership for Fidelity, told USA Today. Otherwise, you could get hit with a 10% penalty and be stuck paying taxes on the money you withdrew.