More dip early into funds for retirement
Hardship withdrawals can cause long-term jeopardy
By Ross Kerber
Globe Staff / June 6, 2008
Record numbers of Americans are raiding their retirement savings as the economy has soured, threatening their long-term financial security to make their mortgage payments, pay medical bills, and cope with rising food and fuel costs.
Three decades ago, individually controlled retirement plans like 401(k)s barely existed. Most Americans counted on a pension, with funds contributed and managed by their employer, to provide for retirement along with Social Security payments. But today, workers have accumulated $3 trillion in 401(k) accounts - up from $1.6 trillion in 2002 - making them a tempting target for households looking to get through tough times.
The three largest administrators of 401(k)s - Fidelity Investments, CitiStreet, and Vanguard Group Inc. - report a growing number of early withdrawals from the plans in the past year as saving for retirement has taken a backseat to mortgage payments, medical bills, and rising food and fuel costs.
At Fidelity of Boston, the largest retirement plan administrator in the country, the number of people making hardship withdrawals rose 17 percent last year. At Vanguard, hardship withdrawals rose 16 percent in 2007, to 47,197. The share of all custom ers making hardship withdrawals remains relatively low, however; at Vanguard, 1.5 percent of customers made early withdrawals last year, up from 1.2 percent in 2002.
"It's another measure of economic stress among households," said Stephen Utkus, retirement research director at Vanguard in Pennsylvania. "I suspect you'll see people dropping out of 401(k) plans or ending their contributions because they can't afford to save."
Fund executives link the withdrawals to the slowing economy. "We're hearing everything from 'my gas bills are too high' to 'I'm going to a funeral and need to pay for a plane ticket,' " said Bob Gonzalez, who manages a call center for the retirement services group of Wachovia Corp.
James Olson, a minister of the United Church of Christ, lost his position at Boston University last summer, and his job search has taken longer than expected. To meet expenses like the rent on his Jamaica Plain apartment, Olson raided his 401(k) retirement savings account. Olson, 39, said retirement is too far off for him and his husband to think about now. "We did what we needed to do to keep going," Olson said.