Considering a 401k Loan? Weigh Your Options Before Borrowing
BOSTON, MA, October 1, 2014 -- Nearly one million 401k investors initiated a loan from their account during the past year, according to recent Fidelity analysis1. To help pay back these loans, some investors reduce or stop saving in their 401k altogether. But there can be long-term consequences for investors who stop saving, including the potential loss of up to hundreds of dollars in monthly retirement income. The loss can vary greatly depending on the reduction in savings and how long they save at the reduced rate.
"The number of investors borrowing from their 401k has trended upwards in recent years, with more than two million investors now having an outstanding loan," said Doug Fisher, senior vice president, Thought Leadership and Policy Development, Fidelity Investments. "Fidelity's top concern is that within five years of taking a loan, 40 percent of borrowers decrease their savings rate, and more than a third of those stop saving altogether. Reducing your savings rate today could significantly reduce your account balance upon reaching retirement and therefore your monthly income in retirement."
Decreasing Your 401k Contribution? Consider the Long-Term Impact
Our analysis shows that many 401k investors reduce or stop saving at various times in their careers, whether over the duration of a loan or due to other personal financial issues. Investors who take this action could face sobering consequences. To illustrate this, Fidelity conducted a hypothetical analysis2 of three 401k investors who started saving at age 25 -- six percent employee contribution and a four percent employer contribution for a 10 percent total savings rate -- with an annual salary of $50,000. The analysis looked at three separate savings scenarios starting at age 35. The table below demonstrates the estimated monthly retirement income from their 401k for these hypothetical investors.
For hypothetical assumptions see endnote No. 2.
See Infographic below.
Many Investors Borrowing Large Portions of their Balance for Purchase of a Home
Over the past year alone, more than 27,000 investors took loans specifically for the purchase of a home. While it's a small percentage of Fidelity's overall 401k loan-taking population, it is a trend the company has seen increasing over the past five years. Today's average home loan is $23,500, far higher than the average general loan value of $9,100. It represents 25 percent of an average borrower's 401k pre-loan balance4, versus 17 percent for a general loan.
Millennials5 borrow on average 37 percent, or $17,100, of their retirement savings balance for a home. According to Fidelity, borrowing so much at this young age could be a stretch for people who are also taking on a mortgage and might be saddled with student debt.
A greater portion of Gen X6 took home loans than Millennials or Boomers7, averaging $25,600 or 26 percent of their balance. Borrowing a quarter of a person's balance during these crucial income years makes it all the more difficult to stay on track with retirement savings if they reduce or stop saving. According to a Fidelity savings rule of thumb8, Gen X should have at least a full year's salary saved for retirement at age 35 and three years at 45.
Additional Loan Implications Investors Should Consider
Borrowers should keep in mind these additional implications before taking a 401k loan:
Seek Professional Guidance if Considering a Loan
Despite the caveats and drawbacks, there may be times when a 401k home loan is a useful option. However, Fidelity recommends 401k investors carefully weigh all their options when considering a loan, be it a general or home loan, and seek help. The company offers comprehensive educational support to workplace investors as part of its Plan for Life guidance experience. Guidance is delivered online, over smartphones and tablets, during webinars, at in-person worksite meetings, through Viewpoints articles and by walking into one of Fidelity's 180 investor centers throughout the country. It also includes specially trained telephone representatives who are familiar with all aspects of workplace retirement plans, including helping investors understand the possible implications of taking 401k loans.
Watch: New Fidelity video about 5 Tips to Maximize Your 401k on YouTube.
Have Questions about Loans? Engage on Twitter: Fidelity professionals are available to answer common questions about home and general loans on Friday, October 3, from 1:00-2:00 p.m. on @Fidelity using the #AskFidelity hashtag.
About Fidelity Investments
Fidelity's goal is to make financial expertise broadly accessible and effective in helping people live the lives they want. With assets under administration of $5.0 trillion, including managed assets of $2.0 trillion as of August 30, 2014, we focus on meeting the unique needs of a diverse set of customers: helping 23 million people investing their own life savings, 20,000 businesses to manage their employee benefit programs, as well as providing 10,000 advisors and brokers with technology solutions to invest their own clients' money. Privately held for nearly 70 years, Fidelity employs 41,000 associates who are focused on the long-term success of our customers.
1 Fidelity corporate defined contribution data as of June 30, 2014.
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