Why borrowing from the future doesn’t really help in the here and now

Wall Street is cautiously peeking its head out from under the rubble.

But economic revival is not yet translating to recovery on Main Street.

Concerned about rising debt, some employees are withdrawing money from their retirement accounts, and many have stopped contributing.

Financial Finesse Inc., which offers education programs to corporations, has had an “alarming” increase in the number of calls (from 3 percent during the first quarter of 2009 to 11 percent during the second quarter) from employees having trouble “making ends meet.”

Although withdrawing money from a retirement account during a pinch might initially seem logical, the long-term repercussions are staggering.

Penalties for early withdrawal can range from 40 percent to 50 percent, and, over time, the money that should have been accumulating is lost.

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Not contributing to one’s retirement account increases tax liability — therefore, in an attempt to gain money for current needs, more is consumed by taxes.

“It’s a real eye-opener to hear what employees say,” said Linda Robertson, certified financial planner with Financial Finesse. “Wall Street is recovering, but for employees — everyday people — they aren’t feeling it, yet.”

Main Street is still seeing layoffs, furloughs and reduced hours — not exactly an increase in wages or comfort level.

“We’ve seen a trend toward employees’ compromising their long-term financial goals in an effort to make ends meet today,” Robertson said.

During the second quarter of 2009, when the Standard & Poors 500 Index gained 15.9 percent, Main Street employees’ debt increased 6 percent, and retirement funding decreased 4 percent, year-over-year, for those calling the help line at Financial Finesse.

“Obviously, it’s a horrible environment, and it’s led to people using their retirement to supplement their income needs,” said David Twibell, director of wealth management for Colorado Capital Bank. “But it makes it much more difficult to catch up.”

Especially because most people weren’t saving enough before the recession started.

So if they’re withdrawing from, or not contributing to, their retirement funds, “they are spinning their wheels with their retirement savings,” Twibell said.

People need to make tough choices about whether they can live without something now, he said, in order to save money for the future.

For instance, someone who makes $50,000 per year would, with the tax savings and a company match, “literally be leaving $3,300 on the table each year by not participating in a 401(k),” Robertson said, “plus the exponential increase with interest each year.”

Employees are not contributing to their plans at a time when it would be most beneficial.

“For the past few months, it’s been a decent time to put money in the market,” Twibell said.

The idea behind dollar cost averaging is to buy when the market is low, and anyone not currently contributing to a retirement plan is missing out on that opportunity.

And one of the best advantages of a qualified contribution plan is tax-deferred growth.

“You’re doing the worst possible thing from a saving’s standpoint — you’re not only losing out on retirement, but on the tax advantage,” Twibell said.

And for people who are spending today and depending on the government tomorrow — that’s not the best scenario, given the changes likely to happen with Social Security and even some pension plans, he said.

Another unrealistic expectation people have is that they can recoup their losses — or lack of contributions to plans — in the stock market.

“Look at the last 10 years of your account,” Twibell said. “If you only made a few percentage points, how do you expect to make 10 to 15 percent in the next decade — if you weren’t able to make it in the last decade?”

Investors and employees became “conditioned” during the 1980s and 1990s to expect 10 percent to 12 percent returns in the stock market — but such returns are high.

“Historically, stock market returns are 7 to 8 percent,” Twibell said.

But there is an option for employees who are apprehensive or have stopped contributing because they were losing money.

“A better alternative is to invest in a more conservative fund — rather than contributing no money,” Robertson said. “The most common option in a 401(k) is a stable value fund — a type of fixed income fund. It never posts losses, but it doesn’t earn much, either. It’s not diversifying their money — but at least there would still be money going into the plan.”