Times are so rough, 1/4 of boomers are already tearing into their retirement accounts according to this article:
It appeared a couple of days ago on Yahoo Finance and followed up a couple of other articles and comments on that topic recently. This development is troubling. If people are tapping their 401(k) money, it is probably as a last resort. This does not bode well for the economy. Since you pay a 10% early withdrawal penalty for unqualified retirement plan withdrawals, and then must add that amount to your taxable income (meaning you pay your personal top tax bracket rate on that withdrawal), then you add state tax, it is very expensive; therefore, only a desperate man would do this.
Other signs of trouble:
1. recently a friend informed me that his bank shut off his credit line. They reappraised his house and determined the value had dropped. They then sent him a letter informing him that he will not longer be able to use the rest of his available credit. A check around the industry showed that many banks were limiting or shutting off their Home Equity Lines of Credit (HELOC). Banks often take more risk with these loans and indeed the default rate on these types of loans has increased almost 9 fold in the past year according to Comptroller of the Currency John Dugan in this ARTICLE.
The consumer is out of gas. Business at all types of consumer establishments, restaurants, car dealers, retail stores, etc. is down sharply. Ford and the other automakers, INCLUDING Toyota(PR), are seeing weakness in their sales.Combining the point above with this, the consumer no longer has an equity line to spend more than he has. the realization is setting in that he has not enough…then comes the pain…
With income stagnant, and credit increasingly unavailable, everyday costs are rising. Gasoline costs per gallon top $4 and a quick check of jetBlue’s airfares show that my usual trip to San Francisco will now cost me at least 33% more (jetBlue website). Bottom line: inflation is screaming and the Fed isn’t helping.
taking all of these issues together, we can see the strain of consumer EXCESS starting to chip at the armor of our economy. We will need a cleansing period of lower spending, lower house prices and recession to bring our entire economy back to sensibility.
My advice to you? Don’t spend foolishly and cut costs – but realize, in times like this, you might be able to make some smart purchases of things as varied as real estate and consumer items. Remember if you have cash and good credit, you will be one of the few buyers in the market, putting you in a terribly powerful position to NEGOTIATE – foreclosures, auto auctions, heck you can haggle at retail stores – try it (Consumer Reports Article)!
Editor’s addition: you can see an interesting Q&A on taking money from your 401k to pay your mortgage HERE.