Welcome to Financial Advisor IQ

Middle-Income Americans Having Financial Planning Problems?

December 17, 2018

Middle-income Americans appear to be having trouble managing their finances, as indicated by a recent survey looking at who takes out loans from their 401(k) accounts.

Turns out those who earn between $40,000 and $85,000 are 50% more likely to take out a loan from their workplace retirement plans than those who earn less and those who earn more, according to an analysis of more than 4,000 defined contribution plans with around two million participants by JPMorgan, CNBC.com writes.

The researchers concluded that those who earn less are likely less engaged with their 401(k)s while those who earn more don’t need the money, according to the news website.

But the tendency of middle-income earners to take out loans — and thus hurt their retirement savings — could be a sign of financial stress, Anne Lester, portfolio manager and global head of retirement solutions at JPMorgan Asset Management, tells CNBC.com.

It suggests these workers haven’t put away a big enough emergency fund, for example, which typically should amount to about three to six months’ earnings, Aaron Pottichen, senior vice president at Alliant Retirement Consulting, tells the news website.

It may also suggest “cash-flow issues,” Cathy Curtis, founder and chief executive officer of Curtis Financial Planning, tells CNBC.com. This can include overspending, according to CNBC.com, or what the website euphemistically calls “under-earning.” Either way, financial advisors whose clients are considering taking out loans from their 401(k) plans should probably point out the costs of doing so.

"You’re basically robbing yourself of future money by taking a loan," Pottichen tells CNBC.com.

By Alex Padalka
  • To read the CNBC article cited in this story, click here.