Early draws on retirement funds a huge gamble

What do a 50-something couple on the verge of retirement, two single women in their 30s and an aspiring business owner in his late 20s all have in common?

In each case, these real people decided to dip into retirement funds to purchase a home or fund a business. And they did it while the economy was tanking, investment returns were low, property was cheap and a lot of people were asking themselves, “Why not invest in something worthwhile?”

Despite conventional financial wisdom, some Atlantans have been willing to take money from their future to live in the present. Financial whiz Wes Moss (a contributor to the Atlanta Bargain Hunter blog) says these folks are — in a roundabout way — doing what the Feds want them to do.

By keeping interest rates low “the Federal Reserve…is effectively pushing people into taking risks,” Moss says.

That said, no financial expert, including Moss, would normally advise withdrawing money from retirement funds.

“From a financial perspective, pulling money out of a 401K [or IRA] is terrible. You pay taxes and penalties and the worst part about it is, it pushes up your tax bracket. It’s a triple threat,” Moss says.

It’s so inadvisable in the world of finance that some experts would not even be quoted in a story that could be perceived as supporting such folly. So let me be clear, this column is not suggesting that you take money out of a retirement fund to buy a home or start a business. But since some people do it, let’s talk about it more.

Atlanta-based realtor Kathryn Flowers saw more homebuyers paying with cash last year.

“Last year, when home prices were depressed, more people were paying cash and even going into their retirement accounts to be able to take advantage of the deals,” Flowers says.

In 2008, after banks denied him a small business loan amid the economic downturn, Kamal Grant, 32, did the same to launch Sublime Doughnuts in Atlanta.

“I said to myself, ‘This is what you want to do for the rest of your life. Why keep the money in a 401K and bet on retirement?’ Why not bet on my skill set and invest the money in me?”

He was 27 at the time, admittedly “young and dumb” and rationalized he could always start over.

He’s since made that money back and with a burgeoning franchise operation (there is already a Bangkok location), is on track to continue watching his money grow.

“I think it was a good decision,” he says.

Maybe, but Moss advises extreme caution.

“It is such a gamble,” he says. “There are lots of consequences.”

Still, Moss notes, anyone with a enough conviction will beg and borrow to bring their dreams to fruition, whether the dream is a new business or a mortgage-free home.

The financial world runs in cycles, and right now we’re still easing our way back to normal, says Moss. When we get there, the traditional principles of financial planning will likely return.

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