November 2013 > Loans and Hardships Can Erode Retirement Savings

Retirement Corner

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Loans and Hardships Can Erode Retirement Savings

For some participants, a plan loan can be a financial necessity. But how does borrowing affect retirement outcomes? Fidelity Investments, one of five approved providers in the University of Texas Retirement Program, recently analyzed loan and hardship withdrawal trends—and their impact on retirement readiness—among 20,600 retirement plans and 12.3 million participants nationwide. Here's what they learned.

    1. Borrowing is All Too Common: One out of every nine participants took a new loan last year. Of these, the average amount taken as a loan was $9,000.00.
    2. Hardship Withdrawals Occur Less Frequently:  2.3% of participants applied for hardship withdrawals in the last year. The two most common reasons were to prevent foreclosure or eviction; or to pay outstanding medical bills.
    3. "Serial Borrowing" is a Savings Threat: 50% of borrowers take just one loan, but the other 50% borrow multiple times. Of those, 10% go on to eventually take a hardship withdrawal.
    4. Borrowers Also Save Less: Lower deferrals, combined with having money “out of the market” can lead participants way off track. The average deferral rate for participants who never take a loan is 8.4%, where as the average for borrowers drops to 6.5%.

Bottom Line: Depleted Retirement Savings

If you compare three hypothetical participants with the same salary rate and investment allocation, but factor in loans and hardships, the outcomes can be vastly different.

  • Jan contributed 10% of her salary and took no loans or hardships.  After 10 years, she saved $364,000.
  • Lisa contributed more than Jan, 13%, but took a series of loans.  Even keeping current, with her loan repayments, after ten years she still has less, at $313,000.00
  • Hugh contributed 10% of his salary like Jan, but then took a series of loans and hardship withdrawals totaling $186,000.00.  After ten years, his total savings was only $131,000.00.

To learn more about the true costs of taking loans from your retirement plans, please visit the Retirement Program Educate Me page at, where you can view presentations on everything from the true cost of a loan, to whether TRS is going to be enough to ways to help manage your debt.  Take control of your future by learning all the facts.


Courtesy of Fidelity Investments