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Welcome to the Deerwood Realty Show. I'm John Schink. It's the day before the 4th of July, and I was looking at some news and saw an article that I wanted to discuss: "Should you cash in your 401k or just go through foreclosure?" I have some thoughts on that. Let's get to the article.
This was an opinion piece in MarketWatch, so take it for what it's worth. It says rising numbers of Americans are making emergency hardship withdrawals from their 401k plans to avoid eviction or foreclosure. New data reveals that the main reason people are raiding their retirement accounts is to avoid losing their homes. In 2023, 39% of hardship withdrawals were used to avoid home foreclosure or eviction, up from 31% two years earlier. This is alarming considering these withdrawals are happening during an apparent economic boom with an unemployment rate below 4% for the past two and a half years. The surge in demand for emergency cash shows that consumers aren't just getting squeezed by overall inflation but also by rising housing costs and high interest rates.
Savers under 59 and a half can tap into their 401k plans without paying a 10% early withdrawal penalty only in certain legally defined circumstances, including avoiding eviction or foreclosure, paying college tuition, or medical expenses. Withdrawals totaled 72 for every 1,000 savers in 2023, averaging six per month. So, what's going on here? People can't pay their rent or mortgage, so they are taking out their 401k to pay their bills.
I found a comment on Twitter saying that this just delays the inevitable and destroys your retirement in the process. The suggestion was to give the keys back to the bank and let them foreclose instead of ruining your retirement to keep a house a little longer. The fact is, most people can't afford their mortgage payments, and as your friendly local neighborhood agent, I tend to agree with that.
I have some questions to go over. Is it ethical to turn in the keys and walk away from a structured payment? Over the past 20 years, it seems people often do this regardless of ethics. We are in a low-trust society. I'm not giving financial advice, but in cases of financial hardship and eviction or foreclosure, this is something people might consider.
In 2008, during the crisis, people often decided their house was too expensive and either looked for a new deal or a place to rent, leaving the house to sit and giving it back to the bank. This has been done before. There may be programs to help eliminate foreclosures, but you have to do what you need to do.
Let's go over some questions:
- What are the long-term implications of making hardship withdrawals from your 401k to avoid foreclosure? You run out of money for retirement, which benefits no one.
- How do rising costs and interest rates contribute to financial stress even during economic booms? Wages do not seem to be outpacing inflation, so you have to do more with less. The unemployment number is great, but wages aren't keeping up with inflation.
- What are the potential risks and benefits of letting the bank foreclose on your home instead of tapping into retirement savings? There's a lower credit score and social shame, but many people move out of a house without mentioning foreclosure.
- How have legislative changes made it easier for people to withdraw from their 401k plans in times of hardship? One of the conditions for hardship withdrawals is foreclosure.
- What strategies can real estate professionals recommend to clients facing these financial dilemmas? Sit down and talk. Is there equity in the home? Can you get out from under the home without using your 401k? The market is hot right now, but that might not be the case everywhere. Check with an agent to see if a short sale makes sense.
The narrative around a short sale is difficult because we're in one of the hottest housing markets in history. If you're living in a house you haven't done anything to and it's now valued much higher than you paid for it, you might feel like you've accomplished something. But what if house prices go down? If people have pulled out a home equity line of credit to cover payments, it’s a dangerous situation. Who refinances into a 7% or 8% mortgage?
That's what I have for you today. Thank you for watching and listening, and I'll catch you on the next one.