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Using retirement money now

June 13, 2012

This is a guest post by Micah Warren.

A few weeks ago the Census Bureau reported that more than half of all births in the US are non-white. The social implications are more widely discussed and reported, but the more interesting and worrisome fact is that overall births are sharply declining, especially among whites, ever since the recession hit.

My best guess is that the declines are mostly among the middle class, who are feeling squeezed by student loans, mortgage debt or inability to buy a home, stagnant incomes and employment uncertainty.

Since middle class Americans typically prefer to buy a house before popping out children, it’s fairly simple math: Years ago when the median house price to median income was a little above 2, and nobody was drowning in student loans, and you didn’t have to obtain advanced degrees to make a reasonable wage, most families could comfortably start having children by their late twenties.

Nowadays, the median house is 3 times the median income, people are finishing college/grad school later, have students loans which take a large chunk of what would otherwise be discretionary income, setting the time-line  back 5-15 years.  To most people, this means less kids. I took a different path, and am learning the hard way that I might have made a choice between a home and children in my (relative) youth.

I wanted to buy a house in my thirties, but savings has been hard to come by with three kids (including twins), student loans, high rent, on one income.  I had planned on using retirement funds, until my benefits office, said, “sorry, you can’t touch that money.”


In their own words, “paternalistic reasons.” They don’t want me to jeopardize my retirement.  My retirement has been growing at a very healthy rate, with employer contributions much higher than our discretionary income.

I griped around a bit and the common response seems to be that I would never be so foolish as to mess with the magic money in my retirement funds, to spend today. After all, if had invested $10,000 in Berkshire Hathaway in 1965, my holdings would be worth more than $50 million today, right?

Now I have two points in response to this.

  • Pulling money out of retirement to put on a house may actually be a good idea for an individual.
  • Individuals collectively pulling money out of retirement plans to put on houses is a good idea for the economy as a whole.

The individual

  • Retirement funds are in for a tough road. Firstly, the global economy has hit the skids and will take a while to rebuild. Secondly, the aging population: as these guys from the Fed pointed out, the P/E ratio appears to be linked to the ratio of retirees to people in their prime earnings years. This report seems widely ignored and/or downplayed. About $18 trillion is in retirement funds which will be coming out of the market as baby boomers retire and age. Note that those in the financial services industry have a vested interest in convincing people their retirement funds will grow at a 10.8%, which is bats.   Most retirement funds are in managed funds, which means that they are being eaten away by the typical 1.5% fees that fund managers take. That takes an optimistic 6% underlying growth rate down to 4.5% which is in the range of most mortgages
  • Private mortgage insurance is expensive.
  • Rent money is not equity in your home: 5-10 years rent saving for a down payment is a lot of money.
  • Tax is tax.  Your money will be taxed.  Yes, it may be at a lower marginal rate when you retire, but you don’t know that.  Further, because compounding is nonlinear, a small change in returns makes a much bigger difference than a difference in tax rates.

The economy

On the other hand, if we do pull money from retirement and put in on homes,

  • Home prices may find a bottom sooner. Clearly, if more people like myself have money to spend on houses, more houses will be sold at better prices.
  • Finance will have less money and markets will be more stable. (OWS rant ommitted)
  • More young middle class people will have more babies. Healthier, well-fed, well-educated children will support the economy in the future.  This is the main point here.   The greatest investment in our future economy is children today. Money in an account does nothing, unless you still believe in trickle-down theory.  The middle class is being depleted, and this will be made much worse in the future due to the simple reason that there will be less middle class children to squeeze. Things could get much uglier years down the road if the population continues to age and retire and expect the money they dumped in the retirement funds to be there without the economy to support it.

Bottom line: A large chunk of younger American couples/families are not able to buy homes and participate in the real economy (rather than just as debtors) and we are in danger of losing out on a whole generation of economic output.  This spells a much bigger disaster for our retirement funds than the loss of $20K to home equity.

Instead of choosing a better living standard when our children are young, we are expected to (somewhat selfishly) leave money in a fund that has no guarantee of growth rate, which we have no guarantee will be alive to use, and while optimistically may be spent on glorious retirement, it is also quite likely these funds will be depleted in a few short months by end-of-life care. In the meantime, Wall Street plays puff-puff-give with the money.

I personally would gladly accept financial comfort while my children are young in exchange for a smaller chunk of money later, which gives me little comfort at all, because there is no earthly way to discern what this money will mean to me when I am 70. On the other hand, I can tell you exactly how much a 20% down payment on a $300,000 house is, today.

Categories: finance, guest post
  1. Someone
    June 13, 2012 at 7:29 am

    One of the reasons to not let people play with their pension money is that nearly all people are really bad investors and get fleeced by Wall Street.


    • Parm
      June 19, 2012 at 7:42 am

      So instead, force them to be bad investors fleeced by Wall St. in the form of pension funds/managed 401(k)’s?


  2. June 13, 2012 at 10:33 am

    All of us would like to have this flexibility with our retirement funds. Unfortunately, most retirement systems are badly underfunded – especially those invested in the opaque financial innovations of the last couple of decades. Those allowed to exit with the money would leave the rest holding the bag.

    Most of my retirement is with TIAA’s defined contribution plan. It’s an insurance/annuity product but they report daily the value of my contributions, employer contributions and earnings/losses. If everyone cashed out of that product today, I doubt that TIAA could cover half the claims by selling the assets they have. I’d love to know the market value of the assets backing the fund and verify my doubts but I don’t think TIAA wants to be that transparent. Unfortunately, TIAA is probably one of the better retirement plans. Many are not much better than Ponzi schemes.

    Long-term low interest rates are killing pension funds. I’d hate to be retiring and annuitizing my accumulations at the interest rates offered today (2 or 2.5%.) The monthly payouts are ~40% less than if interest rates were 5-6%. Little wonder that nobody with defined contribution plans wants to retire and annuitize.


  3. Dan L
    June 13, 2012 at 2:32 pm

    The retirement system is *intended* to be paternalistic. The government gives you both incentives (e.g. IRA, 401K) and mandates (e.g. social security, medicare) because we don’t want to end up swamped by indigent old people. For the tax incentives on retirement plans to make any sense, they have to come with penalties (although one could argue that the penalties should be less severe).

    The basic fact is that if you, as an individual, prioritize home purchase over retirement, then you should just avoid putting money into your retirement plan. That’s a choice you make. However, most likely it sounds as if you are complaining about not having access to the employer contributions. But again, it’s an intentionally paternalistic system. In the old days, you would have had a traditional pension, in which you’d have even less access to your retirement money.

    Buying a home is a complicated financial decision. Not everyone does buy a home, and not everyone should buy a home. On the other hand, everyone does need to save for retirement. Presumably you concede that you need to save for retirement but simply just want to save less now in exchange for saving more later. But frankly, the minimum savings level that includes employer contributions is typically pretty low if you hope to live a long time with a modest standard of living (i.e. not so glorious).

    Also, I think that what you call your “main point” is wrong. While it is true that many couples assess whether they can “afford” to have children, I doubt that most couples believe that home ownership is a prerequisite for having children. To the extent that is true at all, it would have to be a very *upper* class mentality, not a middle class one. As mentioned above, buying versus renting is a financial decision. Buying a home is not (or at least shouldn’t be) something that people should do whenever possible. Or to put it more directly, it seems highly unlikely to me that retirement fund penalties have a significant effect on the birth rate. (And assuming that increasing the birth rate is something that we want to do, there are surely much more direct ways to achieve this.)

    By the way, I appreciate that it must be hard to support a family of 5 on one salary. Assuming that you do not also support your aging parents on that salary, imagine if you did. Surely you would not be saying how “selfish” it is for parents to save for their retirements.

    Final thought: Most likely, one big factor in why buying a home might be a smarter financial decision for you than saving for retirement is the mortgage interest deduction, which itself is another bit of interventionist social engineering by the government. (And imho, one that is less justifiable than IRA/401K programs.)

    Even though I disagreed with almost everything you had to say, thanks for the post, Micah! 🙂


  4. June 13, 2012 at 3:56 pm

    Dan – Thanks for the disagreements. A couple replies:

    I don’t actually choose to put money in my retirement. My employer (Princeton) does, at something like $700 / month, which is far more than I could possibly save every month. I had assumed that since they are sending me statements on my individual account down to the cent that this wasn’t mixed up in some crazy long term scheme.

    Am I missing something huge in the math here? Mortgage interest deduction or not, $2300 per month towards rent, gone, see-ya, for the rest of my life, vs. the growth on $20K in my TIAA-CREF fund that could have been used for a down payment. Certainly my kids will not want to pay my rent when I retire. Yeah, some people without high school degrees or jobs should not jump into mortgages the way they were encouraged to do ten years ago. But I think I qualify.

    Also, I’m not saying that penalties will have an effect on the birth rate, I’m saying something more to the effect that – 1) things highly suck for many families in the 25-35 age group who in turn are having less kids 2) when obligatory retirement savings is much higher than discretionary income (which may be negative) we would be much better off if that retirement savings was redirected. To anyone who disagrees with me on that I would ask, how far does this reasoning go? I mean why not cancel Christmas and shovel every dollar into retirement? My kids will thank me in the end right?



    • June 13, 2012 at 4:35 pm

      Speaking as someone in the 25-35 age group that can’t afford kids or a mortgage right now and has mandatory retirement $$ taken from my earnings, I know exactly what you’re saying. That money would be better spent paying off my debt.

      What burns me even more is that I won’t get any of my employer matching funds unless I stick around here for 5 years…but my position is only for 3 years.


    • Dan L
      June 13, 2012 at 10:07 pm

      As an aside, that’s pretty nice that they don’t make you contribute anything in order to qualify for the employer contribution. I could be wrong, but I think that’s unusual. (Just think how mad you’d be if you had to contribute your own money to get the matching employer contribution!)

      Regarding the issue of buying vs renting: While rent money is “gone forever,” so is most of the money that goes into a home that you own. Only a small fraction of what you spend on your home directly builds equity in the first few years. In addition to the obvious mortgage interest, there’s taxes, insurance, fees, general upkeep, etc. Most of the gain in equity just comes from appreciation of the home itself, which brings us to the most important issue: The decision whether to buy or rent is effectively a bet for or against the future of the real estate market (a bet that we cannot escape making). A common argument is that real estate is a very safe investment, but tell that to anyone who bought at the top of the market in Florida several years back. Also, since homes are usually pretty highly leveraged, the volatility of prices is multiplied. One could argue that people who buy and hold their homes for 30 years tend to do well, but some people say the same about the S&P 500. (Personally, I think that real estate is a pretty good investment, but I consider this to be a financial planning decision rather than an unassailable fact.) Also, transactions costs are pretty high, which is a big factor if you think you might be moving in a few years. Finally, there is the opportunity cost of that down payment, which is especially relevant to you, since you say that you prefer to improve your standard of living now rather than save for the future. If you decide to rent while NOT saving for a down payment, that is exactly what you are doing. Btw, NYT has a nice buy-vs-rent calculator. (Their economics guy David Leonhardt likes to talk about this. So does our friend Simon B.)

      But I do see where you’re coming from. In your case, your employer is giving you deferred compensation that they could have just paid you as salary. From your standpoint, they are just unfairly restricting what you can do with your money. But the same argument can be made against social security. Those contributions are very hard on struggling families, but I don’t think that means we should dismantle social security.


      • June 14, 2012 at 7:58 pm

        Right.. I guess I should have considered that the readership of this blog is largely NYC where renting vs buying is a real question. In places like Eugene, OR, I think it’s more of a nobrainer – at least for a family of 5.


  5. libertarian by default
    June 13, 2012 at 6:18 pm

    I’m sympathetic to the arguments here. You’re asking to “change the rules” (regarding how retirement funds can be used) and laying out an argument that (given current circumstances) society is better off with this change. In my mind it’s pretty similar to the idea of principal reduction (again changing some rules, in that case contracts, in a way many believe is net positive for society). For what it’s worth, I had always believed I could somehow use my 401k “for a down payment” and found out a few years ago that it effectively wasn’t the case (it did help me as an asset when applying for mortgage, but couldn’t really be used as cash).

    As with any other unexpected change in rules, it benefits some people, hurts others, and has some extremely complicated effect on society as a whole (even for a given utility function) that I personally don’t think can be predicted (not even that it’s stochastic in nature, but worse than that it’s chaotic). There’s also the destabilizing effect of changing *any* rules (in unexpected fashion) but when it comes to retirement funds I feel like it’s naive to expect things to stay the same long-term so this is less of a factor in this specific case.

    I personally would be in favor of relaxing rules regarding retirement accounts in some way that is stimulative in short-term but tax neutral over N-years (5 or 10?). I don’t think I’d tie it specifically to home purchase as that seems just too unfair and distortive in a narrow scope. In many ways, this is similar to the payroll tax reduction (that’s about to end) in that employers were (are) encouraged to compensate you in a specific (retirement) manner but for a temporary period the government decides to let individuals use that benefit more broadly.


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