401(k) loans are never a good idea

Saving for retirement is one of the best things you can do for your financial future. Check that, it IS the best thing you can do for your financial future. If you aren’t saving for retirement, or you aren’t saving enough for retirement, then you just aren’t going to have the financial future you want. But simply “saving for retirement” doesn’t mean you are on easy street. There is one way you can ruin your chances of retirement even if you are saving for retirement, and it’s by taking a 401(k) loan. If you’re already angry, you aren’t alone, but allow the evidence to convince you.

Consider this scenario: You’re chugging along saving 8% of your income for retirement, plus a 3% match from your employer. By all accounts, you’re doing well. But then the roof needs replacing, or your kid needs to go to college, or you want to pay off some debt. Then comes a whisper in your ear, “What about a 401(k) loan?” Your co-worker has been talking up how much it helped him redo his kitchen. He even said it makes more sense than another type of loan because you are paying interest to yourself. Sounds pretty good! So you fill out the paperwork and cash out a chunk of your 401(k).

See how the rest of this scenario plays out in my column for SmartyCents.com here.

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