Is it Ever OK to Borrow Money from Your Retirement Plan?

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If there’s any financial rule everyone has heard, it’s that borrowing money from a retirement plan is akin to financial blasphemy. That goes doubly if an employer matches contributions to the plan. But desperate times call for desperate measures. Sometimes life presents an unsavory choice: borrow from retirement savings or go truly, irreversibly broke. What then?

Here’s what to consider before you borrow from your retirement savings account.

What is the actual cost of borrowing?

When you borrow from your retirement account, you’re losing more than just the cost of the loan. You’re losing the interest you’d yield from the money. You’re losing savings time. And you may be losing an employer’s contribution to your account. When calculating whether the loan is worth it, and how much it costs as compared to other options, take these factors into account. If you’re contemplating borrowing a large sum, it may even be worthwhile to meet with a financial advisor to assess whether a loan from your retirement account is your only, or best, option.

Can you repay the money? Will you?

Before taking a loan from your retirement account, ask yourself whether this is really a loan. Can you repay the amount, with interest, while also making contributions in the future? If not, then you must treat the money as a permanent loss to your future self. Make your calculations about whether to take the money with that in mind.

Before you take the money, devise a comprehensive plan for repaying the loan. This plan should be a realistic one, based on your current expenses and income—not a fantastical projection of a wealthy future with few or no expenses.

Are you losing free money?

If you don’t max out your employer’s matching contributions to your retirement account, you’re basically lighting free money on fire. When you take out money your employer has contributed, you’re doing the same. Think carefully about the costs of removing this money from your account, and weigh the decision against the value of the loan to your life and financial well-being.

Is there a better option?

A loan from your retirement account should be considered an option of last resort. Don’t even think about borrowing from your retirement future until you’ve explored other options. Ask yourself the following questions:

  • Can I take out a loan with interest that is lower than the loss I’ll take on a retirement loan?
  • Is there another way to fund this need, such as by working overtime hours or getting help from a family member?
  • Is this something I absolutely need?

 

If you’re already retired and own your home, consider a reverse mortgage. If you follow the terms of the loan, you can access cash without having to repay the loan, so long as you remain in your home.

Is it a matter of life and death?

If there’s no other option for funding something that is truly a matter of life and death—rehab for a child who is addicted to drugs, treatment for cancer, an organ transplant—then no other consideration matters. You won’t be here to enjoy your retirement savings if you don’t tend to the needs of life today. So if it’s a true matter of life and death and there’s no other option, go ahead and take the loan.

How will this affect me?

Even if you think you can repay the loan, don’t borrow from your retirement if you think you’ll be haunted by stress and guilt. Negative emotions about the loan can actually undermine your ability to repay it, so be honest with yourself about how the loan will affect your emotions and behavior.

How to Budget Like a Pro

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Budgeting is something that many people just avoid dealing with. Thinking about money can be stressful for some people, and too often, even saying the word “budget” makes people feel restricted. The reality, however, is that you need a budget. Even the very wealthy need a budget. Here’s a secret, in fact: the very wealthy are often wealthy precisely because they know how to budget. So how can you learn to budget like the wealthy?

 

Track Your Spending

Have you ever gotten to the end of the month, checked your account balance and wondered, “Where did it all go?” The truth is that many Americans do not have a clear sense of where they spend their earnings. “Tracking” your spending does not, by the way, mean keeping a mental record.

There are a number of smartphone apps that can help you easily and efficiently track your spending. Many come loaded with preset categories but also allow you to create your own categories. Every time you spend even a single nickel, note it. Record it in an app on your phone. Write it down in a notebook if you prefer. It doesn’t matter how your track it, just that you do track it by writing it down and eventually categorizing your spending. If you’ve never budgeted before, this is a good place to start.

 

Pay Your Savings Account First

When a paycheck comes in, save before you spend. Decide on an amount that you plan to save per paycheck; 10% is a good place to begin. When you deposit your paycheck, immediately transfer 10%, or whatever amount you have committed to, to a personal savings account. It’s estimated that 26% of Americans have no savings at all—if you’ve been having trouble with this you aren’t alone. It is essential that everyone have sufficient savings, however.

It’s recommended that everyone save six months’ worth of income. The idea is that if you were to suddenly lose your job, you’d be able to get by for six months while you find a new job. You may even want to explore purchasing insurance to insure your income in case of a catastrophic event; it’s recommended that you speak to your local insurance agent about this option.

 

In a Tight Spot, Do You Work More or Spend Less?

If finances become stretched, you should absolutely not live beyond your means. Sometimes it’s tempting to simply spend more using credit cards. This approach, however, will only create more stress, and it’s certainly not how the truly wealthy think about budgeting. Spending more than you have will not serve you well in the long run.

Instead, you need to make a decision to either work more, thus securing more income, or spend less if your budget is tight. Which of these options you choose is truly up to you. Maybe you value time with your family and don’t want to give that up in order to work more. That’s fine, but you need to find creative ways to cut down on spending. Maybe having more income will ultimately mean less stress in your life; in that case, working more may be the better option.

 

Why Budget?

Thinking about a budget may be the last thing you want to do, especially if you are under financial stress. However, creating a budget and sticking to it is really the only way to start to deal with this stress. Only by knowing where your money goes, paying yourself first and making changes where you need to can you start to control your finances, rather than allowing them to control your emotional state.

These attitudes towards money are the attitudes of the wealthy. Make them yours, and you’ll be on the path to financial freedom.

Retirement Wars: Assisted Living vs. Staying with Your Family

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Part of the process of getting older in age is trying to figure out the best way to care for your elderly parents. There is the eternal debate over if you should find a suitable assisted living program or just let them come stay with you. It’s not a simple conversation to have and it encompasses many people. You have to know how having the person in your home will affect the current ecology of your current lifestyle.

Will the addition of an elderly parent cause a financial burden? Is there adequate space to house your mom or dad in a spare room, or will adjustments have to be made? Perhaps the kids will now have to share a room- but, how will that effect their overall attitudes toward the situation? Simply put, there are no easy answers to any of these questions.

In order to best figure out what is the right fit for your family here are some talking points to figure out if bringing the parent into your home is the right idea for your family.

What Do They Want?

It can be tough to talk to your parents, or your spouse’s parents, about their financial situation, especially if it isn’t so flexible. But, if caring for them is a part of your future, you need to be able to prepare for it. Don’t be afraid to ask the parent if they even want to live with you in the first place. You may be surprised to find that they’d prefer to go to an assisted living facility. Which could ease the potential burden of having another person in your home.

Will You Need to Add-On, Renovate or Remodel?

If the parent does want to move in to your home, you’ll need to consider privacy, safety and care. Is your home big enough to accommodate an extra person? Will you need to add an extra bedroom or go through with a major overhaul of your home? Of the available space, is it wheelchair accessible? Do you need to have grab bars installed in bathrooms or other spaces? Some simple researching online could estimate the total cost of what will be required from the parent. It’s important to understand what is needed and how it will impact your homeowner’s insurance.

What Kind of Insurance Do They Have?

Understanding the financial reality facing your parent(s) is a critical step in finding them a forever home. However, so is getting acquainted with their insurance coverage. Is long-term care insurance part of their plan? What exactly does their plan cover? Not only will housing renovations potentially cost you money, but their medical costs can also be a factor you will need to account for in your budget. Can you split the cost with them and their insurance?

Find Out What It Will Cost You

With all of these figures running around, it may seem like a lot of money. However, it still might be less expensive than the assisted living facility of their choice. Don’t assume that it will be cheaper to provide care yourself, a survey from AgingCare.com found that an estimated 34 million Americans are personally providing care for elderly family members, and 34 percent of them spend $300 a month or more of their own money. If you don’t know the total cost of having your parent live with you versus how much it will cost to put them up, you will never fully have a good idea of the true weight of the situation.

Is the financial aspect of taking in an elderly family member going to impact you in a positive or a negative way? Ultimately, the choice is up to you and your family to make together.