Wednesday, May 18, 2011

Is REW the new MEW? (Retirement Equity Withdrawal)

by Bill McBride on 5/18/2011 10:50:00 AM

Reader "Soylent Green is People" asks if Retirement Equity Withdrawal is replacing Mortgage Equity Withdrawal (MEW) for those in need?

Borrowing from retirement accounts has definitely increased. From CNBC two weeks ago: More Americans Raiding Retirement Funds Early

... 19 percent of Americans — including 17 percent of full-time workers — have been compelled to take money from their retirement savings in the last year to cover urgent financial needs, the Financial Security Index found.
And from a new study by Aon Hewitt: Leakage of Participants’ DC Assets: How Loans, Withdrawals, and Cashouts Are Eroding Retirement Income Note: "DC" is Defined Contribution - like a 401(k) plan.
As of year-end 2010, nearly 28% of active participants had a loan outstanding, which is a record high. Nearly 14% of participants initiated new loans during 2010, slightly higher than previous years. The average balance of the outstanding amount was $7,860, which represented 21% of these participants’ total plan assets.
Hmmm ... $7,860 is 21% of total assets? That means the average total balance is less than $40,000 for participants who borrow from a DC plan.

Also - check out page 4 of the Aon Hewitt study. The 2nd graph shows that 32.8% of participants in the 40 to 49 age cohort have DC loans, and 29.0% in the 50 to 59 age cohort have loans. These people have next to nothing in their retirement plans and most will probably have to rely on Social Security if they ever retire.

Note: Politicians are trying to limit this borrowing, from Bloomberg: Senate Bill Would Limit Using 401(k)s as Rainy-Day Funds

My feeling is REW isn't really the new MEW. The size is much smaller, and this borrowing is much more need related as opposed to buying bigger toys, or being used for home improvement. But as "Soylent Green is People" suggested in his email to me, this reliance on REW is "an indicator of financial peril".

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