Home » Posts tagged '401k'
Tag Archives: 401k
oftwominds-Charles Hugh Smith: Eating Our Seed Corn: How Much of our “Growth” Is From One-Time Cashouts?
We as a nation are consuming our seed corn in great gulps, and there will be precious little left in a decade to pass down to the next generation.
Anecdotally, it seems a significant percentage of our recent economic “growth” is being funded by one-time cashouts of IRAs, 401Ks, sales of parents’ homes, etc. This is the equivalent of eating our seed corn. Once these pools of savings/equity/capital are gone, they aren’t coming back.
I personally know a number of people who have cashed out their retirement account 401Ks (and paid the taxes) to pay for their kids’ college expenses–in effect, cashing out their retirement to lower but not eliminate the debt burden of their offspring who bought the “going away to college” experience.
The cashed-out 401K delighted the government, which reaped huge penalties and income taxes, as the cashout pushed the annual income of the recipient into a high tax bracket. (“Hardship” withdrawals for medical care and education waive the penalties, but the income tax takes a big chunk of the withdrawal.)
The middle-aged person who cashed out their retirement will not work long enough to save an equivalent nestegg. Not only is time against such an accumulation of retirement savings, so is the stagnant economy: companies are slashing 401K contributions to offset rising healthcare (a.k.a. sickcare) expenses, and many workers young and old alike are finding jobs that pay them as self-employed contractors or part-time jobs with no benefits.
Another set of middle-aged people are withdrawing from IRAs (and paying the penalties) just to fill the gap between expenses and income. For a variety of reasons, many people are loathe to cut expenses or are unable to do so without drastic changes in their lifestyle. So they withdraw from the IRA (individual retirement account) to cover expenses that are left after income has been spent.
This “solution” is appealing to those whose incomes have declined in what they perceive as “temporary” hard times.
Another pool of equity that is being drained is the home equity in aging parents’ homes. The government will only pay for one set of medical expenses (long-term care, for example) if the elderly person has assets of less than $2,000 (as I recall). Given this cap, it makes sense for elderly homeowners to transfer ownership of their home to their offspring well before they need long-term care (which can cost $12,000 to $15,000 a month).
A variety of other medical expenses can arise that cause the home to be sold to raise cash–either expenses for the elderly parents or for their late-middle-age offspring who develop costly health issues. Family disagreements over sharing the equity can arise, leading to the sale of the house and the division of the equity among the offspring.
This cash is immediately hit with a variety of demands: a grandkid needs a car, somebody needs money to go back to graduate school (pursuing the fantasy that another degree will provide financial security), and so on–not to mention “we deserve a nice vacation, a new car, etc.”, the temptations in a consumerist culture that we all “deserve.”
Once the family home is sold, the furnishings and other valuables are also sold off to raise cash. In many cases, the expense of transporting the items across the country to relatives exceeds the value of the furnishings.
One common thread in all these demands for liquidation of equity is the short-term need is pressing. A consumerist culture offers few incentives for long-term savings other than life insurance, IRAs and 401Ks, and all of these can be tapped once a pressing need arises.
Though people may want to hang on to their nestegg, they are faced with short-term needs: how else can I pay tuition, or this medical bill?
As incomes have stagnated and costs for big-ticket expenses such as college and healthcare have soared, the gap between income and expenditures has widened every year for the bottom 90%.
Even those in the top 10% are not protected from draw-downs in retirement funds and family equity in homes and other assets.
Retirement funds, home equity, family assets–these are the financial equivalent of seed corn. Once they’re cashed out and spent, they cannot be replaced.
In more prudent and prosperous times, these nesteggs of capital were conserved to be passed on to the next generation not for consumption but as a nestegg to be conserved for the following generation. That chain of capital preservation and inheritance is being broken by the ravenous need for cash to spend, not later but right now.
So how much of the recent “growth” in GDP results from our consumption of seed corn? It is difficult to find any data on this, something which is unsurprising as the data would reveal the entire “recovery” story as a grandiose illusion: we as a nation are consuming our seed corn in great gulps, and there will be precious little left in a decade to pass down to the next generation.
We face not just an impoverishment in consumption but in expectations and generational assets.