This Attempt to Help Hurricane Victims Could Ruin Their Retirement

Cracked nest egg
Photo by Candus Camera / Shutterstock.com

Sometimes in life, you have two choices: “bad” and “worse.”

That’s probably the case for many residents of the Southern U.S. who just lived through hurricanes Harvey and Irma, the worst storms to strike the country in more than a decade.

Millions of people now face unexpected expenses as they repair their homes and try to stitch together other threads in the torn fabric of their lives. And given that more than two-thirds of Americans have virtually no savings, it’s a safe bet that few of these folks have any money squirreled away for what has proven to be the ultimate “rainy day.”

Clearly moved by their plight, U.S. Rep. Kevin Brady, R-Texas, has come up with what seems like a compassionate gesture. Brady is thinking about introducing legislation that would temporarily remove the 10 percent penalty that most people incur when they withdraw funds from their 401(k) plans before age 59 ½. The exception would apply only to people impacted by Harvey and Irma.

Undoubtedly, this would provide financial help to hurricane victims when they need it most. But just for the short run. And taking advantage of Brady’s idea could prove disastrous in the long run.

Cracking your retirement nest egg

To explain how Brady’s seemingly good idea could turn so bad, a little simple math is in order.

Let’s say you live in Houston, and you got off relatively easy during Hurricane Harvey. Flooding caused $5,000 in damage to your house, a significant — but not financially disastrous — sum. You need to make minor repairs and replace some waterlogged furniture, but it’s nothing that can’t wait a little while.

Unfortunately, you are among the many millions of Americans who do not carry flood insurance. To fix your damages, you use Brady’s proposed loophole and withdraw the necessary money.

In itself, that might not be a bad idea. But only if the Brady proposal allows you to you pay the money back into your 401(k) account at some point. And only if you do so quickly.

But let’s say you don’t. And given Americans’ chronic inability to save, there’s a good chance you won’t.

In that case, the $5,000 missing from your 401(k) account can quickly become a giant black hole that sucks up many of your retirement hopes and dreams.

If the S&P 500 grows at 10 percent annually — roughly its historical average — investing that $5,000 in an index fund inside your 401(k) would leave you with about $87,000 after 30 years. Exercise a little more patience, and the money would grow to more than $226,000 after 40 years.

Or, you could end up with zero dollars — if you withdraw the money from your 401(k) plan and never replace it.

And it could get even worse. Brady has not yet revealed many details about the proposal he’s considering. However, some reports have indicated that withdrawing money early will still require you to pay taxes on the amount.

And it’s possible that even if penalties are temporarily lifted, the Brady proposal will include a provision that re-imposes penalties on people who never pay back the money.

Look at alternatives to pay for repairs

To be fair, organizations such as the American Retirement Association have voiced support for allowing Americans to tap their 401(k) accounts in the wake of a disaster. And certainly, there might be circumstances where prematurely withdrawing 401(k) money to pay for hurricane costs is the best of a bad array of choices.

Still, the potentially life-altering consequences of prematurely withdrawing money from a 401(k) account is a chief reason why many experts say you should exhaust all other alternatives before cracking open your nest egg prior to retirement.

It’s also why economist Douglas Holtz-Eakin, former director of the Congressional Budget Office, thinks Brady’s proposal is a bad idea.

Holtz-Eakin told the Washington Post that there is a “long list” of programs that can help hurricane victims, including community development block grants and small business loans.

He believes lifting the 10 percent penalty will tempt too many hurricane victims to make bad choices. Holtz-Eakin told the Post:

In the best case, a smart person will understand the trade-off and make the right decision. In the worst case, they will just follow the government incentives rather than do what’s best for them in the long run.

Brady has yet to formally introduce any legislation. But even if he does — and it becomes law — consider all your other alternatives. It’s almost certainly better to get a part-time job, postpone your spring trip to Europe, or simply tighten your belt several notches for a year or two instead of prematurely tapping your 401(k).

Your future self is likely to thank you while sipping colorful drinks on a quiet beach somewhere.

For more ideas on generating cash quickly, check out:

What do you think of the Brady idea? Let us know why by commenting below or on our Facebook page.

How to find cheaper car insurance in minutes

Getting a better deal on car insurance doesn't have to be hard. You can have The Zebra, an insurance comparison site compare quotes in just a few minutes and find you the best rates. Consumers save an average of $368 per year, according to the site, so if you're ready to secure your new rate, get started now.

Read Next
7 Surprising Things That Damage Your Credit Score
7 Surprising Things That Damage Your Credit Score

A seemingly small stumble can cause your credit score to plummet.

Brace to Pay More for These 26 Prescriptions in 2020
Brace to Pay More for These 26 Prescriptions in 2020

More than 600 drugs — including these commonly prescribed meds — have seen price hikes so far this year.

How to Prepare Your Finances for Retirement in 7 Steps
How to Prepare Your Finances for Retirement in 7 Steps

Here is how to get your finances in shape for your golden years, one step at a time.

3 Costly Social Security Mistakes That Women Make
3 Costly Social Security Mistakes That Women Make

Women face unique challenges when planning for retirement and making these mistakes can result in a skimpier retirement.

These Are the 4 Best Medicare Advantage Plans for 2020
These Are the 4 Best Medicare Advantage Plans for 2020

Medicare Advantage customers themselves rate these plans highest.

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Most Popular
Will I Get My Ex-Husband’s Social Security When He Dies?
Will I Get My Ex-Husband’s Social Security When He Dies?

Two factors determine how much money is coming to you.

7 Ways to Boost Your Credit Score Fast
7 Ways to Boost Your Credit Score Fast

Your financial security might soon depend upon the strength of your credit score.

21 Things You Should Always Buy at a Dollar Store
21 Things You Should Always Buy at a Dollar Store

Dollar stores have great bargains on these familiar purchases. Yes, even pregnancy tests.

13 Brilliant Bulk-Buy Items on Amazon
13 Brilliant Bulk-Buy Items on Amazon

Every household should have these products on hand. Buying them in bulk on Amazon saves you cash.

6 Reasons I Will Never Trust Suze Orman
6 Reasons I Will Never Trust Suze Orman

Beware: The self-proclaimed personal finance expert has a track record that suggests more sizzle than steak.

5 Household Disinfectants That Can Destroy the Coronavirus
5 Household Disinfectants That Can Destroy the Coronavirus

You likely already have some of these products at home.

This Type of Social Security Benefit Is Often Overlooked
This Type of Social Security Benefit Is Often Overlooked

The Social Security Administration is not helping certain people get money to which they are entitled, a report says.

Getting These 2 Shots Could Reduce Your Risk of Dementia
Getting These 2 Shots Could Reduce Your Risk of Dementia

These vaccines may lower the risk of Alzheimer’s disease by up to 40%.

America’s Most Reliable Appliance Brand Is a Surprise
America’s Most Reliable Appliance Brand Is a Surprise

Have you heard of this appliance manufacturer?

9 Everyday Problems You Can Solve With Vaseline
9 Everyday Problems You Can Solve With Vaseline

Forget expensive specialty products. Good ol’ petroleum jelly can address many common annoyances.

16 Amazon Purchases That We Are Loving Right Now
16 Amazon Purchases That We Are Loving Right Now

These practical products make everyday life a little easier.

19 High-Paying Jobs You Can Get With a 2-Year Degree
19 High-Paying Jobs You Can Get With a 2-Year Degree

These jobs pay more than the typical job in the U.S. — and no bachelor’s degree is required.

19 Purchases That Buyers Almost Always Regret
19 Purchases That Buyers Almost Always Regret

Think twice before buying these things.

7 Tips for Building an Emergency Stockpile
7 Tips for Building an Emergency Stockpile

A pandemic or natural disaster could leave you reliant on your existing food supply. Is your pantry prepared?

8 of the Worst Things to Buy at a Dollar Store
8 of the Worst Things to Buy at a Dollar Store

Not everything sold at dollar stores is a great bargain or a safe purchase. Here’s our list of products to avoid.

Homeowners Say These 2 Kitchen Appliance Brands Are Best
Homeowners Say These 2 Kitchen Appliance Brands Are Best

One brand takes five of the top honors, while another ranks highest in three categories.

41 Things You Should Never Buy
41 Things You Should Never Buy

Some purchases are just plain dumb. Give yourself — and your budget — a break. Don’t spend money on this stuff.

9 Indestructible Products That Are Worth the Price
9 Indestructible Products That Are Worth the Price

If you’re willing to pay a little more for these products, you may never have to shop for another again.

5 Ways to Get Amazon Prime for Free
5 Ways to Get Amazon Prime for Free

Hesitant to drop $119 a year on an Amazon Prime membership? Here’s how to get it for free.

View More Articles

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Add a Comment

Our Policy: We welcome relevant and respectful comments in order to foster healthy and informative discussions. All other comments may be removed. Comments with links are automatically held for moderation.