Extraordinary financial stupidity

slomo007 said: What's the big deal? Social security will take care of me!

My first instinct is not to care, since it's not my problem if people have to work as Wal-Mart greeters because they were idiots and bought a car with their 401(k). The problem is that's not what's going to happen, they are going to vote themselves the money of those of us who actually had some self-discipline. I can already hear the politicians saying "oh don't worry, we're only going to take money from those who have more than X dollars in their retirement accounts. They're rich, they can afford it, we need to do this for social justice!" Time to start a thread on how to move your retirement savings into offshore bank accounts.

TxAggieJen said: I know someone who took out a large chunk of money (and paid the penalty obviously) to use it in other investments. I just sat there in shock, didn't know what to say.
It is a pity 401k accounts don't allow investment in Agape, forcing someone to do what you describe!

Yeah, they say 46% of workers, but they don't mention anything about percentages of total funds. I had like 200 bucks in a 401K from a job I quit about 3 days after one deposit. I ended up paying the $20 fine because I didn't roll it over in time. I would count in that 46% then.

Don't judge.

Whenever I counsel people finanacially, the first thing I must determine before I advise is whether thay are just trying to survive or are they evolving.

I counsel accordingly.

Don't judege people just trying to make it to Friday.

The United States is the wealthiest nation in human history. I really doubt that 46% of Americans are just trying to survive.

Part of the problem is the lack of financial education in our schools. A basic understanding of personal finance should be required to graduate high school. Unfortunately the few schools which do teach that topic focus on stock picking contests and similar idiocy which is worse than useless.

ppatin said: patch96 said: Don't judge.

If the foolishness of people's actions isn't pointed out to them then they won't learn from their mistakes.

incompetent people do not know they are incompetent. they are not interested in learning from their mistakes. they want to believe what they believe and do things the way they know how. most people do not want to improve themselves if it requires effort. they want things handed to them, without work and without a lot of explanations.
so, just let me be!

micker said: Currently 14% of adults in the US are on some sort of public assistance and 45% of all children in the US have been part of the WIC food stamp program at some point in their lives.
The best way to reduce the number of people on welfare is to cut their incentive to be on it. Plus we need to tighten the restrictions on the use of funds, verify the eligibility of those applying for it and limit the amount of time they can be on it. If you can't find a job where you are, you can make one for yourself or move to another state or country where there is one.

ppatin said: My first instinct is not to care, since it's not my problem if people have to work as Wal-Mart greeters because they were idiots and bought a car with their 401(k). The problem is that's not what's going to happen, they are going to vote themselves the money of those of us who actually had some self-discipline. I can already hear the politicians saying "oh don't worry, we're only going to take money from those who have more than X dollars in their retirement accounts. They're rich, they can afford it, we need to do this for social justice!" Time to start a thread on how to move your retirement savings into offshore bank accounts.

That's not social justice. "Social justice" is typically for people who have little/no opportunity to begin with...not middle-class True American Heroes® who whine about their job not allowing them to get luxuries like a new car every year or a 5000-square-foot McMansion.

micker said:
Currently 14% of adults in the US are on some sort of public assistance and 45% of all children in the US have been part of the WIC food stamp program at some point in their lives.

Maybe parents shouldn't be breeding kids that they can't feed. The fact that so many teenagers are being idiots and getting knocked up is an indictment of their poor judgement, not of American society (although I suppose it's partially our fault for no longer placing a stigma on out of wedlock pregnancy).

scrouds said: 401k are flawed in that if you leave a job that won't let you keep the 401k, and don't ACTIVELY roll over the money, they will send you a distribution.

You are then required to deposit the check with an additional 10% from your own pocket to avoid taxes. Force the companies by law to keep 401ks above lets say $250 and you'll see a lot less withdrawals.
Actually, the withholding on 401(k) distributions is 20%. That means that the recipient must deposit the check plus 25%.

Example: 401(k) balance is $10,000. Distribution is $8,000. Recipient must deposit the original $10,000, by means of $8,000 check plus $2,000 from his own pocket, to avoid taxes and penalties. The $2,000 withheld counts as income tax withholding, so the recipient can recover it in full come tax time, but, sadly, the average person doesn't have $2,000 lying around.

By the way, strategically cashing out a portion of a retirement fund can be a smart thing to do. If you were in a medium-high tax bracket when you put the money into the 401k (say... 28% + a high state tax rate ~9%) and you expect to pay little or nothing in taxes this year because you have become unemployed, it may make sense to either withdraw money for investments that are inconvenient to keep in an IRA or for a Roth rollover.

aeiouy said:

Cashing out your 401k is not universally stupid. It is entirely dependant upon each individual situation and the value of doing it ranges from absolutely necessarily to completely stupid.

Green for that statement alone!

ThePessimist said: scrouds said: 401k are flawed in that if you leave a job that won't let you keep the 401k, and don't ACTIVELY roll over the money, they will send you a distribution.

You are then required to deposit the check with an additional 10% from your own pocket to avoid taxes. Force the companies by law to keep 401ks above lets say $250 and you'll see a lot less withdrawals.
Actually, the withholding on 401(k) distributions is 20%. That means that the recipient must deposit the check plus 25%.

Example: 401(k) balance is $10,000. Distribution is $8,000. Recipient must deposit the original $10,000, by means of $8,000 check plus $2,000 from his own pocket, to avoid taxes and penalties. The $2,000 withheld counts as income tax withholding, so the recipient can recover it in full come tax time, but, sadly, the average person doesn't have $2,000 lying around.

Yes and no. I stand corrected, they do take out 20%, and the whole 20% is considered federal income tax withholding.

Payments that aren't qualified under an exemption catagory also are charged a 10% federal excise tax. In this case, you will only be allowed to recover 10% under normal circumstances though your tax filing.

If you want to avoid the excise and income taxes, you would have to deposit the extra 20%, not 10%. 25% doesn't really make sense and I suspect that is a typo.

scrouds said: 401k are flawed in that if you leave a job that won't let you keep the 401k, and don't ACTIVELY roll over the money, they will send you a distribution.Only if it's less than $1000, and only if the plan wants to kick you out.

If your 10% penalty is less than $100, paying it is stupid, but the odds are it isn't the stupidest thing you do that day.

hartop said: i know some people that plan on cashing out their 401k when they get laid off

their reasoning is that they can't afford the mortgage payments on unemployment so they don't have much choice but to go ahead and pay it all off with the 401k money

are there any better alternatives for them?
The time to buy a life-jacket is not when you are already drowning.

The better alternative is to have an emergency savings to cover your normal expenses, including mortgage payments, for a few months (how many months is somewhat person-dependent but 6-12 is a reasonable goal). This is to be built when you are still employed by not living paycheck-to-paycheck.

Sure, some get wiped out despite reasonable caution. 46% sounds way too high, so some of us are assuming that a good number of those are just unaware of the cost of a withdrawal or were recklessly unprepared for a not-so-unusual financial difficulty.