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Borrowing Against Your Retirement: More Costly Than You Think

Participating in the Company's Retirement Plan is a smart and important decision. Smart because you are putting away small amounts today for a comfortable retirement later.

As your account begins to grow, it may be tempting to “dip into” your retirement savings by taking a loan against your retirement plan to pay your annual taxes, repair a leaking roof, catch up your everyday pile of bills, and so on. And while the decision to take a plan loan is yours to make, we want to make sure that you consider what it will really cost.

With a retirement plan loan, you pay yourself back the amount plus interest. But the true cost can be shown with the loss in your retirement savings. You lose money when you borrow from your retirement account for several reasons, which are listed below:

  • You lose making money on the earnings or compounding of those earnings.
  • You repay the loan with after-tax dollars.
  • There is (typically) an initial set-up and quarterly loan fee.
  • Most employees decrease or cease the amount they are contributing to compensate for the loan payment.
  • You may not be paying yourself back the same amount you would have earned if you left the money invested.

To further illustrate the costliness of taking a plan loan, consider the following hypothetical example*: Jane took a $10,000 loan at 7% interest from her retirement account; her account balance before the loan was $20,000. She previously made contributions of $150 per paycheck (including the employer match). Because she had to repay the loan, she decreased her contribution to $50. Additionally, prior to the loan, she was earning a 10% return. Now she will repay the loan over five years. If you take into account loss of interest, compounding, and tax on repayments, the actual retirement plan loan is costing Jane 13.77%! And don’t forget about those decreased contributions, which can add up to hundreds of thousands of dollars over many years.

*This example is hypothetical and intended for illustrative purposes only.

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IMPORTANT DISCLOSURE INFORMATION

MCF Institutional is an SEC-registered investment adviser d/b/a of MCF Advisors, LLC (“MCF”). Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or any non-investment related content, made reference to directly or indirectly in this brochure will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this brochure serves as the receipt of, or as a substitute for, personalized investment advice from MCF.  To the extent that a reader or listener has any questions regarding the applicability of any specific issue discussed herein to his/her/its individual situation, he/she/it is encouraged to consult with the professional advisor of his/her/its choosing.  MCF is neither a law firm nor a certified public accounting firm and no portion of the content should be construed as legal or accounting advice.   A copy of MCF’s current written disclosure statement discussing our advisory services and fees is available upon request. If you are an MCF client, please remember to contact MCF in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing / evaluating / revising our previous recommendations and/or services.