Mortgaging the future in desperate times

Laid off and facing a long job search, Bob Cundiff was worried about making ends meet.

Cheryl Ambruse needed a “breather” from her mortgage payments.

Jan Gentile lost her job and her family’s health benefits. She faced mounting medical bills on top of mortgage payments and other day-to-day expenses.

Although years away from retirement, all three turned to money they had meant to save for their golden years, either cashing out or borrowing against their retirement savings to pay more pressing bills. In doing so, they joined the growing number of Americans who are being forced to trade future comfort for more immediate needs because of the economic crunch.

A Hewitt Associates’ survey found that 6.2 percent of retirement account participants at large corporations had taken an early withdrawal as of Sept. 30, compared with 5.1 percent who reported taking early withdrawals in 2006.

A separate October survey by the American Association of Retired Persons found that 13 percent of Americans 45 and older had tapped into their retirement investments early.

The decision to dip into retirement funds early usually requires paying a heavy financial penalty. In addition, experts warn, the financial hit can be compounded by both the lost savings and the lost chance for interest income down the line.

“You really want this to be a last resort,” said David Certner, legislative policy director for the AARP.

But with the market down, the economy weak and the credit markets tight, some say they had little choice but to turn to their retirement funds.

Medical bills pile up
By this point in life, Jan Gentile and her husband, Jon, planned to be empty nesters, comfortably living in the house outside Birmingham, Ala., that they built themselves in 1998, and perhaps even traveling a little bit.

Cracked Nest egg **Special report by Birmingham freelancer, for use only with related story**

Their plans changed dramatically when they decided to legally adopt their granddaughter, now 8 years old. But they were really thrown for a loop after Gentile, 56, lost her job in human resources last April.

Gentile and her husband, a sportscaster, 48, had always relied on her job for health care benefits. After she was laid off, the couple could only afford to cover health insurance payments on their own for a couple of months. Once they were without insurance, health care bills mounted, and the couple began to worry about paying other expenses. Their cars were in jeopardy and they fell behind on the mortgage to their dream house, which they also hope to eventually leave to their granddaughter.

“We had to make ends meet,” Gentile said. “We have a home to hold on to, we have a child to raise. We have medication to buy every month.”

As the months dragged on and Gentile still couldn’t find a new job, they felt they had no choice but to cash in some individual retirement accounts. While they still have other retirement savings, Gentile thinks that decision, combined with the cost of raising a young child, means she will probably have to work past the normal retirement age.

“We were counting on those. We were building on those,” Gentile said of the retirement accounts. “We just thought that money would be there for us, and it was a real hard decision to make.”

In mid-September, Gentile was finally able to land a job that includes health care benefits, but the salary is much less than she was making before. As they work to get their finances back on track, the family has had to cut back on little luxuries like dinners out, trips to the movies and  buying new clothes.

One of the hardest decisions was to tell her granddaughter that she could no longer take horseback riding lessons because they couldn’t afford it.

“She loved those horseback riding lessons,” Gentile said.

By the time Bob Cundiff was laid off from the construction and development job he’d held for a decade, he had already begun to worry about his job security and the dearth of new prospects. Facing what he feared could be a protracted job search, he decided the best way to avoid financial disaster would be to cash out of his 401(k) plan, which was already losing money because of the falling stock market.

“It just came down to a matter of just doing a budget,” Cundiff said.

Cundiff, 53, used the retirement funds to pay off credit card debts and a car loan, bought himself a new bicycle to commute with and helped out with his daughter’s wedding.

He used what was left, combined with unemployment benefits, to keep up with living expenses for nine months, until he was finally able to land a job on a trial basis in mid-October. His financial future remains far from certain: The new job doesn’t have benefits and pays less than he used to make, and he’s not sure it will become permanent.

Although he had to pay a stiff penalty for the early withdrawal from his retirement fund, Cundiff feels like it was worth it because the market continued to fall sharply.

If his new job becomes permanent, he may start a new retirement account, depending on how the market performs. But at this point, he said he’s more likely to invest any extra money in residential real estate, in the hopes of financing his retirement by becoming a landlord to local college students in his hometown of Terre Haute, Ind.

That, of course, will depend on whether he can save up enough money to make any down payments plus qualify for the loans he needs to buy up the properties.

“It’s going to depend on the economy,” he said.

Certner, of the AARP, said that if more people like Cundiff prematurely spend their nest egg it could worsen the already worrisome problem that Americans don’t have enough savings. Certner said that even before this current crisis “we were seeing a pretty large underpreparedness for retirement.”

'Almost a nervous breakdown'
Cheryl Ambruse knows she has made some financial mistakes. There was the decision to buy a nicer car, even though it meant taking on a much higher car payment. Then there was the decision to take out a second mortgage with a drastically higher interest rate, which would take years to refinance. And there were those many, many daily decisions just to put a purchase at Home Depot or another store on one of her credit cards, all of which gradually accumulated into thousands of dollars in debt.

The mounting financial woes had been eating at Ambruse for a couple of years. But this summer, as gas and grocery prices soared and she continued to deal with a drop in her overtime and bonus pay, things came to a head.

“I felt like I was having almost a nervous breakdown,” she said.

Faced with the serious possibility of filing for personal bankruptcy, Ambruse, 47, decided instead to take a loan out against her 401(k). Although she will have to pay back the loan with interest, she is hoping the money will allow her to make a few house payments, thus freeing up her paychecks for the most onerous of her credit card debt.

“That gives me a breather,” she said.

Certner said borrowing against your 401(k) is a slightly better alternative than cashing out. Still, he said, it carries risks, particularly if you lose your job or somehow find yourself unable to pay back the loan.

It’s not the first time Ambruse has taken a loan against her 401(k), although she has continued to pay money into it. But the Coon Rapids, Minn., resident doesn’t see another clear option. She already works two jobs — full-time as a bill collector for Target and part-time doing the same work for Wells Fargo, clocking in around 60 hours a week on average.

Meanwhile, her fiancé is worried that his job with a newspaper could eventually be in jeopardy, so he is also going back to school to be an auto mechanic.

She’s not sure when the couple will finally tie the knot. Even a quick trip to Las Vegas seems too pricey right now.

“There is no money for a wedding,” she said.

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