No, don't do it!
Upwards of 35 to 38% of you who have 401k plans are taking loans out against them.
Do you understand the impact that that has on your future retirement and your ability
to pursue that retirement you desire?
In this video, I'm going to share with you a couple of times that may be it's
okay to take loans, but for the vast majority of you, I want to share with
you the impact of taking a, a simple $5,000 loan would be on your retirement.
But before we get there, subscribe to our channel, hit the notification bell.
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So there was a recent study done by Ramsey solutions that indicated those
who had created wealth, and they defined that as a million dollars, that the vast
majority of them closing in somewhere on the, on the vicinity of 57 years
old, or thereabouts had accumulated that wealth primarily through their
employers, retirement plan, your 401k.
So shouldn't we be managing this properly?
So let's step back for a moment and at least understand the framework,
the concept of what a retirement plan is specifically, a 401k, for you.
You have the ability on a systematic basis each and every paycheck to put money away.
Sometimes your employer is matching.
Then you choose a particular investment set up for a long
period of time for your retirement.
It grows tax deferred and the benefit is that you, if you don't touch it,
it should be growing to put yourself in a position where you may be able
to pursue those retirement dreams that you've been thinking about for years.
I want to talk to you about the really big benefit of having
an employer retirement plan.
And I want to frame it with a conversation about compound interest.
Einstein called compound interest the eighth wonder of the world.
So let me share with you the story of two different people.
One who started really early in life and put away $2,000 a year, and one
started a little bit later but did the same, the same $2,000 a year investing,
think about this in terms of your 401k plan, if you will, if you put in
$166.67 every single month into the 401k, just, just think about that.
And let's go to my screen for a moment.
So on the left-hand side of the screen, we show for example, And we're
using a 20 year old here who invests for eight years, eight years only.
They put in $2,000 away every single year, and they invest $16,000 on the
right hand side, as someone who saved starting at 28 until they're 67.
So they save for 39 years, Where they invest a total of $78,000.
Now you would think the person who invested $78,000 would have more at age
67 than the person who only invested $16,000, but here at a 9% rate of return
and certainly no guarantees for any future performance, but as you see here,
example, one shows the person who only say for eight years, but started early.
At the age of 20 and never again, invested after the age of 28 had
$676,000 of money in their account.
On the right hand side, it showed the 39 years at $2,000 a year for $78,000.
Invested grew to $595,000 or about $80,000 less than the
person who saved starting earlier.
So the real lesson here is save as early as you can.
It's not about saving big chunks of money, just save little pieces
of money for a long period of time.
And you put yourself on a higher probability that you might may have
that chance to succeed in retirement.
So in my view, Taking a loan out against a 401k plan is a very bad
idea, but there are two scenarios where I believe it's okay.
So these are the only two reasons that I believe you should be taking out a loan.
The first is if you have a hardship, And hardship is where
something dreadful has happened.
You have no other resource or recall no money anywhere else, and you can
take money out of the 401k plan, and if the plan has a hardship withdrawal
provision, then of course you take it out.
You have no other choice.
The second reason is if you are buried in credit card debt, And if you're
paying 12 to 15 to 18% and it's killing you on a month to month basis, with
all that you have to spend on those credit card balances, then maybe
make an agreement with yourself that you stop making contributions, not
taking money out, but just stop taking contribution, making contributions
to the plan for a year or two years.
Get out from under the debt which is burying you.
And then you can come back in to the point.
Those are the two good reasons that you could take money out.
I know this can be confusing, and I know if you're preparing for retirement, what
I want you to do is invest two minutes in yourself, go to our banner, take our quiz.
After two minutes, we'll score for you, which of the three retirement
planning stages you are in, and I'll send you a free chapter of our book.
Don't outlive your money in retirement, right?
And I'll also send you a couple of worksheets to give you some more clarity
as regards to how to put yourself on track for a successful return.
So I'm going to talk to you now about the impact of taking a $5,000 loan.
This is an example of a 35 year old who is going to be taking
out a $5,000 loan from the 401k.
We're assuming a five-year loan period, a 5% interest rate on the loan.
And we're assuming here that of the hundred and $50 usual contribution
to the plan that this person will be paying back the loan.
And that amount will be $44 per period.
Now this addresses the one myth, if you will, that when people say I'm taking
a loan out, but I'm paying it back.
I'm paying myself back that that in a sense they are doing that.
But also you miss out on the opportunity to have this money work for you.
I also have here that the balance of the contribution and the $150 after
paying $44 on the loan will be $106 going towards the regular contribution.
You know, the reality is though that if you are taking out a loan from your
401k plan probably means you're under some, under some financial duress.
And the studies show that many people, when they do take a loan out,
reduce the amount of contribution sometimes just down to the point where
they're only paying back the loan.
So as you see on the left-hand side, it's a $5,000 loan.
And on the right-hand side, what we're showing is no loan so, what is the
impact in the past this case scenario?
Again, I kept the $150 contribution here, but I think that that's
going to skew this a bit.
This is the most favorable outcome for this individual.
And we're assuming a 7% rate of return, obviously no guarantees
for any future performance.
What is the impact of taking that $5,000 loan out at the age of 65?
As you see on the left-hand side.
You have a balance of about $607,000, or it costs you a little over $50,000 in
retirement savings by taking out a $5,000.
Now it gets even worse, by the way, if you've taken out this loan and
you change jobs and you haven't paid back that loan, then that loan can
show up as income to you and you'll have to pay taxes on that income.
So it's not a good scenario.
For the vast majority of you taking a 401k loan is just not a good idea.
And for more information on 401ks, take a look at this next video.