Is Your Employer 401k Retirement Plan Safe?

Bernie Madoff has been demonized in the media and in the financial industry as being the biggest financial fraudster of the 21^st century. His victims were not only the incredibly wealthy, but also the middle class employee such as the teacher and blue collar line worker. He knew no boundaries when it came to scamming others out of their money and it didn’t matter if you had a little or a lot, if you had it he was determined to rid you of it.

However, I’d like to go on record as being the first to say that there’s an even larger, more sinister force at work in the investment world that could affect any of us. This is a real threat to anyone who is worried about their financial future and security.

Early Withdrawals From Your 401k May Be Killing Your Retirement Plan

Many may believe that an early withdrawal from a 401(k) plan is a victimless crime, however, that couldn’t be more inaccurate or farther from the truth. This crime can tear a family apart and ruin not only your life, but the lives of your loved ones and dependants. The pain of an early withdrawal can last forever and recovery of these funds is seldom realized.

If you participate in a 401(k) plan, you know that the ultimate purpose this retirement account is to help you save money for your future. A 401(k) plan comes with the idea that you will be able to take care of yourself when you decide you don’t want to “work” anymore and your retirement savings will work as a supplement to other retirement income. This distinction being made, the problem lies in the fact that we often consider our retirement accounts not to be a supplement to our retirement plans but as the actual retirement plan itself. This mistake and poorly factored assumption will keep us from realizing the true fruit of our labor when we need it.

Some financial experts have a tendency to argue that an early withdrawal from a retirement account is actually a loan that we are making to ourselves. Therefore, we repay ourselves once we repay the loan so it’s a win-win situation. On paper that might be true. However, there are early withdrawal penalties and taxes that you are charged that most people will not consider. In addition, that is money that will never be recouped and the opportunity costs are lost forever.

Surviving during an economic crisis leaves many without options and lack of options can cause a person to make poor financial decisions. I can assuredly and confidently say we will see another economic crisis in our lifetime. However the question remains: What are we going to do to be better prepared the next time any of us are faced with a financial challenge?

From my own personal opinion and standpoint, I suggest that in addition to your employer retirement savings plan, pay yourself first.  Look at your take-home pay and determine what you can comfortably save each pay period. Also, examine your current spending plan and see if there are any areas that will allow you to save more? Consider cost effective options that will allow you to save money, as well as encourage a more creative and exciting life. Consider implementing “at home” entertainment that might save dollars, but won’t cut down on your fun. Invite your friends over for a movie night or game night and create a fun, personal environment that a movie theater or a noisy restaurant can’t compete with. Not only will you spend less money, but the relationships with the people close to you will flourish and prosper while your bank account breathes a little easier.

Inevitably, my goal is for you to examine what will be comfortable financially for you and your household without cutting back on the quality of your life and the relationships with the people who are in it.

More Money Equals Better Choices

Let me introduce you to Pam. Pam works for ABC Company where she contributes to her employer retirement plan each pay period. In addition, she has a savings account with her local community bank where she contributes $100 each month. Pam uses direct deposit for her savings account so contributions are made automatically each month from her paycheck.  Pam has enjoyed the benefits of her separate savings account for 5 years and has accumulated a nice “rainy day” fund of approximately $6,000. Pam’s decision to invest $100 per month into herself has provided her with the opportunity to make better choices. If she is ever faced with a financial tight spot, she has a pool of resources that she can access without tapping into her employer retirement account. This guarantees a sound plan for her future as well as a safeguard “in case of emergency”.

We all need to follow Pam’s example and invest not only in our future, but also devise a plan that will help with our peace of mind and our ability to be confident, no matter what life throws at us. With a comprehensive and diverse financial plan, we don’t have to worry about one of those “eggs breaking” because they definitely won’t be in the same basket!