Report: Millions Draining Retirement Accounts to Pay Debt

An increasing number of Americans are tapping into their retirement savings long before they’re retired – a move our Louisville bankruptcy attorneys recognize is undermining retirement security for a huge swatch of our population. piggybank.jpg

Financial advisory firm HelloWallet reports that a quarter of working Americans are taking out huge withdrawals from their 401Kk) and retirement savings. Of the $293 billion that is deposited into these accounts each year, about $74 billion is being withdrawn by those who have yet to reach retirement age.

A big part of the reason people are making this move has to do with paying down debt or covering basic, monthly expenses. The problem with this is not only are you paying huge penalties on those withdrawals, you risk becoming indigent in old age, when you’re unable to work.

What many people may not realize is that there are alternatives, and a Chapter 7 bankruptcy is one of them. Most people think of it as a last resort. The truth of the matter is that waiting to file until you’ve drained your retirement savings puts you in a more precarious situation. Such accounts are protected in a bankruptcy, so that’s money you could have otherwise kept.

If you are using retirement money to help make ends meet, a bankruptcy can help by eliminating debt.

A huge part of the concern is that many of these individuals aren’t going to be able to rely as heavily on benefits such as Social Security and Medicare like past generations. Federal agencies are looking to make significant cuts to these programs in an effort to reduce the federal deficit.

More and more, retirees are going to be on their own, which is why this trend is especially troubling.

The newly-released report indicates that people in their 40s are the ones most often dipping into these accounts, with one in three seeking at least a measure of debt relief in such fashion.

Another new report, this one by one of the country’s biggest 401(k) managers, Vanguard, shows that since 2008, when the economic crisis hit, there has been a 12 percent increase in the number of people who took out loans against their retirement. The loans are reportedly the top way people are taking this money out. It does require that the money be repaid, but it’s done at the cost of steep penalties and interest. For families that are already cash-strapped, this often does more financial harm than good.

This trend is also prompting employers to question whether these plans are even worth it, since they are paying top dollar for management firms to handle them and employees aren’t truly benefiting in the long run. In an increasing number of cases, the only entity reaping the rewards is the management firm.

To offer a little background, the 401(k) program was first established by the federal government in the late 1970s, as there was a heightened concern regarding the the increase of retirement costs and dwindling federal resources. It used to be that pensions were the retirement security upon which most people relied. Now, only about a fifth of workers have a pension, meaning 401(k)s have become the savings plan on which people are counting.

Those who study the programs say that when people tap their retirement savings on anything but retirement, except in the most extreme cases of desperation, it’s a mistake.

But people don’t seem to be looking at the bigger picture. What they see is this: stagnant wages, higher costs for goods, children who want to attend college, homes that need repairs, credit card debt that’s higher than ever – and they view this as a way out.

Our Louisville bankruptcy attorneys want to stress that it’s not the best way out – and it’s certainly not the only one.

If you are struggling with debt, don’t dip into your savings. Contact us today to learn more about your options.


If you need to speak to a Kentucky bankruptcy attorney or Louisville foreclosure defense firm, contact the Schwartz Bankruptcy Law Center at 866-270-4495 for a free and confidential consultation to discuss your rights.

Additional Resources:
401(k) breaches undermining retirement security for millions, Jan. 14, 2013, By Michael A. Fletcher, The Washington Post
More Blog Entries:
Creditors in a Louisville Bankruptcy Have to Prove 11 U.S.C. 523 Standing to Collect, Dec. 6, 2012, Louisville Chapter 7 Bankruptcy Lawyer Blog