Raided Your Retirement Account? How to Rebuild

Rising unemployment, layoffs, foreclosures, and eroded market values have left us all feeling the effects of the economy's downturn. The markets have come back some, but employers and employees have changed their funding of retirement accounts in response to lower earnings. Even more alarming is an increased trend in the liquidation of retirement accounts by individuals in their 30s and 40s. The temptation to dip into retirement accounts is hard to resist when you don't have enough money to pay the bills. If you've already made the mistake of raiding your retirement account, it's not too late to rebuild.

The problem is that all too often these accounts are not sufficient to pay off the amount of debt in question, but many people are glad just to stave off disaster for even a little while. Ultimately, you will end up worse off in the end. Qualified retirement accounts cannot be counted as assets in bankruptcy proceedings. By leaving your assets in your retirement accounts, you protect yourself from losing everything. On top of that, raiding your 401k makes you pay a 10% early withdrawal penalty and you lose principal selling low in this weakened market. But even if you did give in to temptation, you can still make a cozy nest egg for your retirment. You will just have to work at it a little harder.
 

Adjust Your Expectations

After coming back from a financial crisis, retirement planning goals must change. Assess your expenses - the bare essentials. Speak with a financial planner to get an indication of the average retirement living expenses including health care costs adjusted for inflation. How much do you need to have just to get to that level? How much do you need to save each month to get there?
 

Pay Yourself First

You have probably already spent out your emergency cash account, if you had one at all. Financial advisers once recommended to have 3 to 4 months of living expenses in cash reserves. Now, it is recommended that you have 8-10 months. Getting back on your feet financially requires commitment, a greater commitment than you have given your creditors in the past. Pay yourself first, every month, no exceptions. Once you have a cash cushion built up, you should strive to save the maximum allowable amount in your retirement account. If you can save even more, combine the 401(k) with an I.R.A. account.
 

Spend Less

Though obvious, this is difficult even for those who have been on the brink of financial disaster. In fact, failing to keep to a budget is the leading cause of many personal financial crises. Find every place you can cut: the cell phone, the cable bill, eating out. If you haven't already changed your habits, take a close look at your spending patterns.
 

Plan To Work Longer

While this is not the ideal, it the reality for most workers. Saving more for longer will help you rebuild the account without taking on more risk. Even working until 3 years longer and contributing the maximum to your retirement account can increase your retirement income by as much as 20%. The income from Social Security is greater when you postpone retirement a few more years.
 

Tax Refunds

If you are accustomed to large refunds, reevaluate your withholding exemptions. Having that money in the budget every month is far better than having the government holding it for months and months. The government doesn't pay interest. If you do get a refund, put it in savings.
 

Consider Annuities

The benefit of knowing exactly how much you will receive makes fixed annuities an attractive retirement funding option for some. Fixed annuities are considered quite safe and offer higher returns than CDs or bonds. The disadvantage of annuities is a lower rate of return than stocks. Also, employer offered 401(k) annuities are not portable, so they are not well suited for younger workers who may change jobs at least one more time before retirement.

The last two years have been humbling. If nothing else good has come of it, this recent economic downturn has forced us to take a closer look at our lifestyles, our decisions, and our priorities. If you, like so many of us, realize that financial good times don't last forever, take comfort in the knowledge that things always bounce back. Learning from these mistakes will help you prevent catastrophe in the future - or at least be better prepared for it.