Borrowing from Your Retirement Plan
By Saghir S. Aslam
Rawalpindi, Pakistan
(The following information is provided solely to educate the Muslim community about investing and financial planning. It is hoped that the Ummah will benefit from this effort through greater financial empowerment, enabling the community to live in security and dignity and fulfill their religious and moral obligations towards charitable activities.)
Many QRP offers loans to participants. Unless you need the money for an emergency, try not to use the option. Borrowing can be an expensive choice in two ways:
- Smaller retirement saving
When you take out a loan, you are losing the benefits of potential investment growth, and that could leave you with a smaller retirement saving. Also, if you stop contributing while you are paying back your loan, you won’t receive any employer matching contributions.
If you leave your employer, the plan may give a short period of time (e.g., 30 or 60 days) to repay that outstanding balance. However, if not paid, the outstanding loan balance is generally subject to income tax and possibly a 10% IRS tax penalty for younger workers.
In addition, cashing out of your 401(k) when you move to a new employer might be costly. Know your distribution options when changing jobs.
- Understanding the cost and length of retirement
Some crucial factors to take into account are:
- Longevity: If you retired around age 65, you could spend a quarter century or more in retirement. As a result, you may need to save enough to last 25 to 30 years.
- Inflation and taxes: Even with a relatively mild inflation over the past 25 years, the cost of leaving has more than doubled. Also consider what taxes you’ll be paying on the money you withdraw from your retirement account.
- Health care: Even with Medicare, you could incur expenses for supplemental insurance, some prescription drugs, and nursing home care.
- Lifestyle sticker shock: A rule of thumb for retirees is to plan on needing approximately 80% of their preretirement annual income.
- (Saghir A. Aslam only explains strategies and formulas that he has been using. He is merely providing information, and NO ADVICE is given. Mr Aslam does not endorse or recommend any broker, brokerage firm, or any investment at all, nor does he suggest that anyone will earn a profit when or if they purchase stocks, bonds or any other investments. All stocks or investment vehicles mentioned are for illustrative purposes only. Mr Aslam is not an attorney, accountant, real estate broker, stockbroker, investment advisor, or certified financial planner. Mr Aslam does not have anything for sale.)
