This is the second deadly sin of personal finance (the first deadly sin was failing to have an emergency fund) and one that some of our friends have been thinking about “committing.” We’re all in our late twenties and buying our first homes. Despite what the experts say, home prices are still very high in the Baltimore and Washington D.C. areas, barely within affordable reach for many people our age. So, our friends are looking for places they can tap to help with a down-payment.
Inevitably, they learn about how they can borrow (or worse, withdraw and be penalized) from their 401(k) to help with the purchase of their first home. This leads right into the second deadly sin of personal finance:
Don’t Raid Your Retirement Funds
Remember when you were a kid and your parents planned a vacation? Part of the fun of the entire vacation was the anticipation of going on a trip. The excitement the night before as you couldn’t sleep, the energy you had packing for the journey, and the planning of events beforehand. In talking to colleagues, retirement is very much like that. You plan new hobbies to try, new events to attend, and new places to see. When you raid your retirement fund, you put all that in jeopardy. You have to slide back the day you hope to retire. It’s devastating and demoralizing.
Sometimes you can’t help it. A lot of people who hoped to retire last fall are continuing to work because their retirement investments fell. I’ve chatted with at least one person who thinks they’ll have to work a few more years just to get back because they were over-exposed to equities. In his case, he was too aggressive and he came up craps on the roll of the dice. With so many other potential problems, why make things harder for yourself by stealing early from the cookie jar.
You need that money if you ever want to stop working. As Gary Bonner, a contributor of BFP, once wrote in Making a Living? Or, Making a Life?: “no one has ever laid on their death bed saying ‘I wish I had spent more time at the office.'” We want to stop working as much as we want to have a new television, or a new pair of shoes, or a bigger house. However, every single time you take money from your retirement fund, you’re extending the time you have to spend at the office.
$1 today is ~$22 in forty years. At a conservative 8% annual appreciation, every dollar you take out now is worth $21.72 in forty years. Twenty-two bucks may not seem like a lot but you have to think of it as a multiple of twenty-two. $100 is $2,200. $1,000 is $22,000. Is the sacrifice worth it? In most instances, no. There is no clear cut answer in the rent. vs. buy question. With so many different situations and scenarios, you can’t clearly say that one is vastly superior to the other. But I can say, without a shadow of a doubt, you will need your retirement funds in retirement and every dollar you take today will steal $21.72 from you in forty years. That’s just math.
Like everything else, it’s not black and white. If you have a major medical emergency and it’s exhausted your insurance and your emergency fund, you won’t have any choice. You will have to raid your retirement fund. My opinion is that it better come to that and I will have to be in very desperate shape before the retirement fund comes into play.