SURVEY SAYS: Taking Retirement Savings Prematurely

Plan leakage is a concern for defined contribution (DC) plan participants’ retirement readiness.

Last week, I asked NewsDash readers, “Have you taken a loan, hardship or other in-service distribution, or have you cashed out a plan upon a job change, and do you regret having done so?”

Nearly 69% of responding readers work in a plan sponsor role, 10.4% are advisers/consultants, and 20.8% work in a TPA/recordkeeper/investment manager role.

Asked which, if any, premature distributions of retirement savings they have taken, 40.8% have taken a loan, and 24% said they have cashed out their retirement plan after a job change. Four percent each reported taking a hardship distribution or other in-service distribution. Two percent said “all of the above,” and 36.7% said “none of the above.”

Nearly 7% said they regret taking a loan from their retirement plan, while 53.3% do not. No one reported regretting taking a hardship distribution, and 6.7% said they do not regret taking a hardship distribution from their retirement plan.

Nearly 7% regret taking an in-service withdrawal, and 3.3% do not regret taking an in-service withdrawal.

More than 13% regret cashing out their retirement plan upon job change, while 26.7% do not.

In comments about taking premature distributions from retirement savings, sentiments were mixed. Some say taking retirement savings prematurely is just a bad idea, but others feel it helps with emergencies and makes sense over increasing debt. I myself have taken a loan once, and like a couple of readers said, I have no regrets because the interest I paid myself was more than what the market was producing. Of course, taking a loan could be problematic if someone leaves an employer before repaying it. I do, however, regret cashing out my retirement plan after I left my first employer, so Editor’s Choice goes to the reader who said, “Cash outs at job change should be eliminated. Either leave it where it is, or do a direct rollover.” 

A big thank you to all who participated in the survey!


I cashed out a small balance, rolled into new employer's plan and then took an in-service withdrawal to use as down payment on my first house. No regrets at all!

I regret not increasing contributions to my 401(k) earlier in my career.

The only reason I cashed out my plan with a job change was because the value was only $600. At the time, it didn't seem worth setting up a rollover IRA, so no regrets here!

I took my loan for exactly what I'd always told new (especially young) employees. The money I'd diligently saved in my 401(k) could be there "when life happens" and you don't have any other options. In my case, our chimney (not covered by home owners insurance) fell in to our front yard the month before we planned to put our house on the market. Instead of risking using cash we might need for the sale/purchase of our new home, or mess with our credit, I took a small loan from my 401(k). Got the chimney fixed, sold the house, and now have a great example for new hires I'm encouraging to enroll.

Should be used only in emergencies. Now in my late 60's I see the importance of continuous uninterrupted contributions.

Dumb, dumb, dumb

There is a time and place. Be mindful about when that time and where that place is.

Have I taken distributions...yes. Have I regretted it...yes. Did I have a Not to beat on the more than exhausted national horse...medical expenses not covered by insurance nearly wiped us out. Losing jobs and a home to the economy completely wiped us out. Starting over again, and then again, at the times we needed it, those 401(k) funds were the only thing that kept us from living in the car.

The amount I received upon changing jobs was only about 1,400, so not enough to materially change my retirement savings.

Heck no! In fact, I've been so good about it I worry I won't be able to pull the trigger when it's time.

In some cases taking a loan is not a bad idea. You pay yourself back plus interest (prime + 1%). If you had just taken the money out of your savings account you probably wouldn't have paid yourself back. This way, I still have the money in my savings account & the money gets put back into my 401(k) along with the interest. Sometimes my interest payment is more than my account would have earned anyway. It is a way of getting your retirement money to work for you a little early. No regrets!


I'm very thankful for the ability to take loans from my 401(k). Actually the interest I'm paying myself is better than the negative year to date performance of some of the other investments!

Verbatim (cont.) 

Taking a loan from your retirement plan is a little like eating that third burrito. It might seem like a good idea at the time, but you'll regret it in the end.

It's better not to, but it's hard to convince a 30-something who wants to buy his or her first house and needs the down payment that the money would be better gotten elsewhere.

Cash outs at job change should be eliminated. Either leave it where it is, or do a direct rollover.

I am glad I have the options listed above in case of a severe need, but I have spoken to too many participants over the years who have no retirement savings and such a bleak outlook of poverty in their retirement years to consider taking funds out now.

Take a look at the Li and Smith [Federal Reserve Board] paper "Borrowing from yourself: 401(k) loans and household balance sheets"

Young and poor is a lethal combination, when presented with what seems at the time to be a life-saving sum of money... if only I had understood compound interest then!

I have been contributing to 401(k)'s for 20 years, and have always rolled over the monies from one employer to another without ever taking a cash distribution. I even got into a long exchange with my current HR over making an indirect rollover from a prior plan for a residual, forced out amount. My company did not know they had to take it under the terms of the plan!

Since I still have several years to work, there is time to make up any lost earnings, if the market stays strong

Premature distributions is an expensive way to get some money, with the taxes, possible penalties and loss of earnings, I don't think for many situations that it's the best course of action.

I don't regret taking out the loan, but when I changed jobs I had to scramble a bit to make sure it was paid off. Looking back - it is clear how easy it is for participants to borrow more than they might be able to repay in a job change - which would suggest more education and more restrictions may be required.

I had to convince my future-self that the distribution now to buy a house and remodel the kitchen would be an investment with a big payout later. I haven't heard any complaints yet.

taking a loan, or a distribution, from a retirement plan, is no different than any other financial decision. You can do it responsibly, and with a full appreciation for the trade-offs - or you can be an idiot. And sometimes, you just have to use that distribution because you have been fired, have no job prospects and have to feed your family. This isn't all about spending that distribution on a Bass boat, people.


NOTE: Responses reflect the opinions of individual readers and not necessarily the stance of Asset International or its affiliates.