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Hands Off that 401(k)

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By royinstl
September 14, 2007

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Hard Post for me to type, because, its not particular fun to tell anyone about me and DW's worst financial decision without good reason or have a great point to make about what we have learned. However, reading and thinking about a resent post where a new poster asked about cashing out a 401K to pay debt got me thinking ... You know Roy- you have a really good horror story that I can tell that might stop someone from doing this.

So here goes - I will try to tell as best I can the reasoning that I believe I had for doing these incredibly stupid moves. But remembering a bit of my old psychology courses, memories and reality get blurred by emotion. I'm not sure I will really ever come to grips with the loss. Enough of that...

I did not get out of college until 26 and worked for the government in DC for about 10 years. I contributed to my TSP regularly so that by September of 1996 I had a little over $82,000 in my 401K. Then we decided to move back to St Louis; I became a consultant and DW had a dream of starting a retail business selling wallpaper and such in a growing area with lots of new construction. To fund our portion of this endeavor I cashed out a portion of my 401K, around $27,500 (I received a check for around $22,000 and proceeded to pour money into the business.) Day-by-day I became more and more involved in this business to the point that we put everything into this, and added another store in another area a few miles away, in an area that looked even better. We took no salary and of course I had no time for my consulting job so I let that go. I took the remainder of my TSP out, all $55,000, and we lived and supported both stores for about 2 years until our money and optimism ran out. We held onto the belief that hard work would make up the difference and eventually we would make a living. Well, it did not work; 12 hour days and nights of doing books and once Home Depot and Lowe's came in we were done. Dropped down to one store, lost employees but still had to sell around $10,000 a month in wallpaper just to pay the business bills. So we cut our losses and closed. By 2001 we where flat broke, no savings, no retirement, 3 kids, lots of CC debt and we did not find TMF until 2005.

I did not look at the numbers until just about a year ago; just too painful to look at, but of the $27,000, we received $22,000 in a check; later we paid the 10% penalty and our AGI that year was around $92,000... so really out of that $27000, we only got around 17-18K. The $55,000 was our only income in 1997 combined with 10% penalty for early withdraw we got a bit more percentage wise, but still pathetic.

Looking at the opportunity lost of this $82,000 in 1996 money if we simply left it alone and not used it would be around $200,000-250,000 today without us putting in another dime. In 2025 somewhere around 750K. Makes me sick to think about it... All from a very quick decision to [take] money from our future and spend it on today. The difference would have been that we would have given up sooner or not overextended ourselves into a misguided dream.

There is no recovery from the loss of a nest egg but, you know all is not lost. Me and DW have been doing wonderfully ever since we came to TMF. You all helped us get out of 45K of consumer debt and when we came here we had only $15,800 in retirement in 2005. Now, by the end of 2007, we will have a bit more then the $82,000 we squandered. We are no where close to where we need to be but holy crap guys because of life changes we learned here on this board we are saving a bit over $1000 every 2 weeks into retirement accounts, so we might pull off a great comeback and not be passing out yellow smiley faces at Wal-Mart because we have to.

Sorry for long post, and I know I should post more, but anyway... if anyone has even the thought of robbing your 401K because of a job change or a new start in life or whatever, DON'T TOUCH YOUR 401K; sink or swim on your today dollars, not on your hard earned future nest egg. This should be the point in me and DW's life where the interest from our investments is really starting to make a big impact on our net worth. I feel compelled to average around 40K a year in savings for the next 7 to 10 years so that one day my investments are making much more than we are and I can become financially free. I am very optimistic - got me in trouble with retail business but at least I did not retire early and come up with this brilliant idea and have no time left to recover.

Roy (Who if nothing else feels just a little better collecting my thoughts)

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