When spending your retirement savings helps you save more money for retirement

The whole “debt is dumb” crowd is amusing… especially when they rage against anyone who dares to defy their logic.

I also find the modern financial planning advice equally amusing in that it assumes restricting access to your savings is good for you and will help you save more money.

For example, conventional financial planning tells you to get out of debt (and stay out) and contribute money to your 401(k) because the money is difficult to access and, by virtue of this difficulty, it will help you save more (because you won’t be tempted to spend it prior to retirement).

Put those two things together (live debt free and also restrict access to your savings) and you have a recipe for disaster.

What to do… what to do?

Well… recently, I was reading some research by Jeffrey B. Wenger and Christian E. Weller, who demonstrated that individuals who are responsible with money end up with more savings when they are given access to their savings prior to retirement compared to not having access to their savings. In other words, give responsible people access to their savings before retirement, and they will contribute more to that savings because they know they can access it if and when they need it.

Seems like something published in Duh Weekly, right?

If you’ve ever done business with me, you’re very familiar with this idea.


Even people who are somewhat bad with money still end up saving more when they have access to their savings. They don’t contribute as much as people who are responsible with money (then again, financially irresponsible people tend not to save much — if anything — at all, so…).

The paper is called Boon or Bane: 401(k) Loans and Employee Contributions, if you care to look it up.

Mucho interesting.

But… also not surprising. I been flapping my gums about this long before that research was published. I dunno. Seems obvious to me that if you make savings accessible, then people won’t be scared about locking their money up for 30 years. In fact, one of the most commonly-asked questions I get from soon-to-be clients is “what if I need this money?”

But it’s not all sunshine and rainbows, my young Padawan.

Some people who are really really bad with money are actually better off without the ability to borrow from their savings. People who don’t manage their money very well, not surprisingly, don’t save very much money. And, they tend to blow money they have access to.

To be clear, the 401(k) plan doesn’t make these folks more responsible. It just delays the inevitable. Those folks are going to be broke when they retire regardless of whether or not they have access to their savings before retirement. They just are. It’s not about math or money. It’s about their own psychology and behavior.

Mayhaps you know people like this. Maybe you ARE people like this.

And if so, you know. Deep down inside, you know. You know whether you’re a saver or a spender. And if you are a spender, you also know deep down inside that you are doomed. No one can help you. And that company 401(k) plan and employer match? You know that won’t help you either.

You’re going to be broke because the problem is obvious: you spend too damn much money.

So… having access to your savings? It’s not for you. But then again, socking money in your 401(k) won’t help you either. You need something no financial planner sells.

On the bright side, if you are a saver, and are responsible with money, then take a deep breath. What you suspected for all these years is true. You are vindicated. You’re not crazy for thinking 401(k) and IRA plans are stoopid for restricting access to your money.

The research specifically looked at 401(k) loans because… why not? 401(k)s are the mainstream way of saving money for retirement.

And here’s where things get a little iffy.

While access to savings did seem to result in people saving more money over the long term, there is an undeniable disadvantage to borrowing from a 401(k) plan — you stop the growth on that savings while it’s being used.

So… you contribute more because you know you can access it whenever you want but… you lose the gains on the money while you’re borrowing it.

Ugh. It’s like driving down the highway with one foot on the gas and one foot on the brake.

Not very efficient, is it?

You can’t make gains on borrowed 401(k) funds because the “loan” is actually a withdrawal from the plan.

There’s a bunch of other kinks in accessing 401(k) money as well like the well-known fact that it causes double taxation of interest paid on the 401(k) loan.


Most 401(k) plans are considered “out of compliance” with IRS regulations.

There are so many of such plans that the IRS hasn’t been able or capable of auditing them all.

Now… most non-compliance issues do not result in the plan being terminated (although, that can happen too). Instead, the IRS puts employers through the Voluntary Correction Program (VCP). As you can guess, the VCP is voluntary only in the superficial sense. If your employer doesn’t correct plan errors, the IRS can do fun things like issue fines, which only serve to make the 401(k) plan more expensive to employees since they tend to bear the final cost of things.

About those fees… back in 2015, Congress passed a new law (probably you didn’t notice, huh?) called the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015. This law is designed to help the government raise more revenue by adjusting civil penalties and fees for inflation each and every year.

Some of the fees that stick out to me include amendments to 502(c)(2), Failure to File Form 5500… the modification to this section increases the fine for not filing this form to $2063 *per each day* the form is not filed.

There is also now an “improper distribution” fine of $15,909 per distribution.

I don’t know how this reconciles with plan loans. I guess it’s up to the IRS to judge it on a case-by-case basis… especially in situations where 401(k) plan administrators are liberal about loan provisions.

If your employer failed to file certain paperwork regarding enrollment and and contributions, that’s a fine of $1,632 per day…

You see a trend?

And there are boatloads of errors a plan can make.

And these penalties are in addition to existing penalties which can be levied under the criminal provisions of the existing tax laws.

So while I am all for financial planning methods which can get you to save more money while also enjoying your life today, 401(k) plans are not the risk free (or even low risk) method they’re made out to be.

They’re just not.

OK, enough about the poor, unfortunate Mr Floyd. Let’s talk about the rich and prosperous Mr. Butch.

Having access to your savings is clearly a good thing. It doesn’t put you in the odd position of having to borrow money from a bank or a credit card company.

At the same time, you don’t want to be penalized for the privilege.

In my weird way of thinking, this is why whole life insurance is so valuable. You get access to your savings when you need it, your savings keeps growing when you borrow against it, and there’s almost no financial risk associated with the product itself. So, if you foresee yourself needing your savings before you retire, then perhaps you need to follow a different path.

David Lewis, AKA The Rogue Agent, has been a life insurance agent since 2004, and has worked with some of the oldest and most respected mutual life insurance companies in the U.S. during that time. To learn more about him and his business, go here.