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Hands off the Stash! - Retirement funds are a last resort, even in case of emergency.
by Erica Hartmann | Illustrations by Jonathan Carlson
When facing an emergency — job loss, serious illness, home damage, crippling debt—tapping retirement funds can seem like a quick fix. After all, with retirement years away, how much harm can you really do?
A lot, says Don Meyer, a Thrivent Financial for Lutherans representative in Woodland Hills, California. “When you take away from your nest egg early, you’re really robbing yourself,” he says. You might get hit with a 10 percent penalty tax, and you’ll have to pay income taxes on your withdrawal. Worse still, you lose any potential earnings on the money you’ve taken out of the plan.
Say, for example, a 35-year-old needs a new car and can’t get financing. So he empties his $10,000 IRA, which has been paying 8 percent annual interest. The true cost of that withdrawal is far greater, since the $10,000, left alone for 30 years with continued 8 percent growth, would have become roughly $100,000 for retirement. Plus, he pays ordinary income tax and $1,000 in early withdrawal tax penalties on the $10,000. Ouch.*
So what’s a saver to do when life deals a financial doozy? “Consider other possibilities,” says Jon Rusten, senior advanced and retirement consultant for Thrivent Financial in Minneapolis. There are ways to make ends meet without touching that stash. Do you have equity in your home? Life insurance? What about non-qualified savings? Here are some retirement-friendly solutions to a few common problems.**
 The Surprise Layoff
What Happens: You lose your job during a company squeeze and can’t pay your bills.
Other Options: While you collect unemployment and look for a new position, work a part-time job to supplement your income, Rusten says. Be aware, however, that you only can work so many hours and earn so much before your unemployment benefits are reduced. For more details, call your state unemployment office. Also evaluate what’s important. What expenses could be reduced temporarily to improve your cash flow? Maybe you trade in your luxury car, eat out less and cut down non-necessary purchasing. “Don’t be proud,” Rusten adds. “Batten down the hatches.”
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 The Serious Illness
What Happens: Insurance doesn’t cover your experimental medical treatment.
Other Options: Put part of the expense on a personal credit card, if you have a zero balance and a commitment to clean credit, Rusten says. Then work out a payment plan for the rest. “Some medical providers will allow you to make installment payments,” sometimes without interest due, he says. Or, they might refer you to a credit company to set up a payment plan with fixed interest. Whatever the case, ask about options, decide what you can afford and follow through. Then remember to review your plan yearly.
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 The Home Debacle
What Happens: A tree falls into your home and insurance doesn’t cover the entire cost.
Other Options: Fix the balance of the damage with funds from a home equity loan—the interest might be tax deductible. A word of caution, however: “Maintain at least a 20 percent equity in your home,” Rusten says, “so if you have to sell, you still have room to bring the price down and recoup some of your money.” No equity to speak of? Borrow against a cash value life insurance contract, Meyer says. In each case, study the terms of the loan carefully and create a payback plan up front. And when income tax time rolls around, ask your tax advisor if you qualify for a casualty-loss deduction.
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 The Credit Crunch
What Happens: You’ve maxed out your credit cards and the creditors are calling.
Other Options: Meet with a competent credit counselor who can negotiate with lenders and get you—and your credit score—back on track. With a counselor’s help, you can make regular, on-time payments at lower interest rates until your balance falls to a workable level. Mortgage brokers and the Better Business Bureau often can recommend good credit counselors in your area.
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“You can dig your way out of these problems,” Meyer says. To speed the process, get a part-time job and dedicate the earnings solely to credit card payments.
Erica Hartmann is associate editor of Thrivent magazine.
An Emergency Fund Can Help
Best-case scenario, you have emergency funds at the ready, says Jon Rusten, senior advanced and retirement consultant for Thrivent Financial for Lutherans in Minneapolis. “It’s six months take-home pay in a liquid account.”
Money markets are a good choice, he says, since they pay higher interest rates than bank savings accounts. They’re also accessible: no penalties for early withdrawal and you can write checks. Laddered CDs and short-term bonds also work well, he says.
To build the fund, put away a percentage of each paycheck. “You work your way into it,” Rusten says. Start with something like $100 a month and up that amount each time you get a raise. “Keep at it until you get that fund where it should be,” he says. You might even sign up for automatic withdrawal to help keep you on track.
The best part? You decide what qualifies as an emergency. You might pay an insurance deductible or buy a new furnace. “Think, ‘things that are not in my budget,’” Rusten says.
—E. H.
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