If you are trying to bridge a financial gap and considering taking a loan from your retirement plan, pause for a minute. This is a major decision that should not be made lightly, as there are consequences that could affect your ability to fund your future retirement. Below are six things you need to be aware of before you borrow from your 401(k) savings:
Your 401(k) plan is one of the best ways to save for retirement and help ensure your future security. Explore alternative options and consider all the implications before you take a loan or withdrawal from your employer-sponsored retirement plan. Otherwise, you may regret today’s decision when you need this money most—at retirement.
Assumptions: The 401(k) participant began contributing to his account at the beginning of 1985. His starting salary was $30,000, with a 2.25-percent pay raise each year, and he contributed 6 percent of his salary to the account annually. The company matched 50 percent of his annual contribution at the end of each year. The participant’s investments were allocated between the S&P 500 (60 percent) and the Barclays Capital U.S. Aggregate Bond Index (40 percent). In the scenario where 401(k) loans were taken, the participant paid back both loans annually over four years, was assessed annual interest of 5 percent on the loans, and did not contribute to his 401(k) during those years. The first loan, for $10,000, was taken in January 1988 to help purchase a house and was paid back by December 1991. The second loan, for $20,000, was taken in January 1998 to help finance a child’s college tuition and paid back in December 2002.
All indices are unmanaged, and investors cannot invest directly in an index. Unlike investments, indices do not incur management fees, charges, or expenses. Past performance does not guarantee future results. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The Barclays Capital U.S. Aggregate Bond Index is an unmanaged market value-weighted index representing securities that are SEC-registered, taxable, and dollar-denominated. It covers the U.S. investment-grade fixed-rate bond market, with index components for a combination of the Barclays Capital government and corporate securities, mortgage-backed pass-through securities, and asset-backed securities.