September 14, 2023

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Good day. Goals are one of the most important, yet often overlooked, aspects of accomplishing anything in life, and financial goals are a great example of this. But, most people give up on those goals in the process. Can you guess what percentage of individuals actually achieve what they set out to do? a. 8% b. 16% c. 25%. Follow the wave 🌊 below for the answer.

Here are the topics for today:

401(k) Hardship Withdrawals Rise — How to Avoid This
How to Set Financial Goals
If You Can't Make Your Student Loan Payment — Do This

INVESTING

401(k) Hardship Withdrawals Rise — How to Avoid This

We're getting a lot of mixed signals from the economy and its consumers right now. Certain aspects have proven resilient so far, but individuals are still worried about their finances.

63% cannot handle a $500 emergency, 61% are living paycheck-to-paycheck, and 73% cite finances as their number one stressor.

Elsewhere, recent data suggests more and more Americans are also starting to tap into their retirement funds as a means of getting by. Bank of America's Q2 2023 Participant Pulse uncovered the following:

On average, 401(k) balances were actually rising — up to $85,300 compared to $75,050 at the end of 2022. Explanation? Market rally.
However, the share of investors taking out loans was up, increasing by 36% from Q1. 2.5% of 75k participants had taken a loan against their retirement plan in Q2, up from 1.9% in Q1 and 2.3% one year ago.
The average loan balance was $8,550, which was in line with Q1's numbers and slightly down from one year ago.
As for hardship withdrawals, the portion of participants resorting to this was up to 0.52% in Q2 relative to 0.4% in Q1 and 0.3% one year ago, a 30% and 73.3% jump.
Remember, 401(k) hardship withdrawals are taxed at your usual income tax rate and may also be subject to an additional 10% penalty if what you spend it on doesn't qualify. As for 401(k) loans, not all plans allow them, you'll be paying interest on it, and you're also robbing your future self of capital gains.

Tips to avoid taking a 401(k) loan or withdrawal

An emergency fund is key: Yes, it's a bland tip, but let's face it, the number one reason why an investor would need to draw from their retirement account is due to a lack of emergency funds. Even starting with a small amount like $1,000 can save you from having to resort to a 401(k) loan or hardship withdrawal.
Aim to extend your savings too: Most planners recommend establishing an emergency fund of anywhere from 3-6 months of expenses, but extending it out even further is usually a plus during these uncertain times. While this is something that might take much longer, it's a worthwhile undertaking to shore up your defenses.
Preventative maintenance is an overlooked aspect of financial wellness. Take a look around and find little things you can do that may help prevent unforeseen expenses from cropping up in the future — taking care of your health, properly maintaining your vehicles and home, and keeping things in order as a whole.
If things get turbulent, pause your contributions: While it's never recommended to stop contributing to retirement if doing so takes from your emergency fund and makes you more susceptible to an unexpected expense in the future, it might actually be wise to press pause or taper back a bit temporarily.

401(k): Withdraw, Borrow, or Not?

Retirement Planning

5 mins

MONEY TIP

How to Set Financial Goals

Money might not buy happiness, but it sure can buy things that contribute toward it. Whether we'd like to admit it or not, money is a big key to some very important factors when it comes to quality of life — things like security, peace of mind, health, access to necessities, and simply the ability to live without worrying about the costs of all your tomorrows.

And yet, very rarely does the money needed for those things come without first having a plan. Setting goals might seem like an optional extra, but the fact is that they're the foundation of achieving the life you want.

Pointers on how to set financial goals

Take care of the basics: Almost no goal is achievable without having a solid foundation to start with. This is why it's so important to first begin to take care of things like budgeting and building up savings for unexpected emergencies. One of the biggest traps with budgeting is not making it realistic enough or making it so restrictive you set yourself up to fail. And leverage tech to help you budget (i.e., YNAB, Mint, etc), and if that's not your cup of tea, using tools like excel or your handy dandy pen and paper can be just as good.
The motivation: Financial goals are hard to achieve without the proper motivations behind them. As you think about your goals, connect each of them to a deeper motivation. And who each of those goals will benefit. For example, writing a will or setting up a trust may be linked to a deeper motivation to provide security for your family.
Prioritize: You can only undertake so many ambitions at once, and trying to juggle too many can often result in accomplishing nothing. Once you've considered your goals and motivations, to make better sense of their priorities, consider timeframes (short vs. long term) and their importance (i. essential vs. nice to have). This way, you can get a bit more organized without feeling overwhelmed.
Layout your options: Taking inventory of what you have and consider what you need for each of your goals. This is where budgeting and documenting your income sources and expenses can help. For example, having a clear picture of how much money you can allocate to different goals each month gives you clear direction on how to move forward. Don't let analysis paralysis get the best of you though because the reality is that things change as we live our lives and inevitably, our goals will too.
Set micro goals to boost motivation: Breaking down your ultimate end goal into smaller, more immediately achievable ones can help keep the momentum going strong. While the big picture remains at the forefront, those little micro goals will be the steps that take you there.
Revisit: Just because you set a plan for now doesn't mean you should set and forget them. When goals get put on autopilot, we can often lose sight of how life might've shifted course over time. No matter how solid you think your plan is, revisit them regularly to ensure goals, actions and motivations are still in alignment.

MONEY TIP

If You Can't Make Your Student Loan Payment — Do This

After 3+ years in moratorium, student loan repayments are finally back in session — interest began accruing again earlier this month, and repayments will officially restart in just a few weeks.

Although forgiveness might be all but foregone for the time being, this resumption does come with some added layers of flexibility and nuance that borrowers will need to consider, especially those who find themselves unable to meet their repayment schedule.

If that's you right now, all is not lost, and there are a few options on the table.

Refinancing: Interest is back, and rates on student loans are also rising. Depending on your loan type and rate, you may be able to find a more competitive interest rate by refinancing with a private lender, which could in turn lower your monthly payment.
An income-driven repayment plan: If you're not already enrolled in an income-driven repayment plan, now is the time to consider it if you're concerned about budgeting for your monthly payment. The Biden admin has made big adjustments to the terms on which you can repay your loans, terms that are heavily dependent on your income. In fact, if you make below a certain amount, your payment could be $0.
Deferment: If your situation warrants it, you can submit a request to put your student loans in deferment for up to 3 years. Be aware though, that you may still be responsible for covering the interest that accrues during that time depending on the types of loans you have.
Forbearance is another option similar to deferment, but the difference is that interest will be incurred and owed on all loans regardless of type. Forbearance is also easier to qualify for, hence its lack of lenience toward interest costs.

🌊 BY THE WAY

by the way

🚶 Answer: Only about 8% of goal-setters actually end up sticking to it and meeting their goals in the end. (Inc.com)
🤖 Your advisor might be using AI to analyze your portfolio soon (Barron's)
👀 ICYMI. Be wary of trends (Finny)
💼 "Lazy girl jobs" are young professionals' new obsession (Marketwatch)
📚 Finny lesson of the day: Your retirement account is a bouy for your retirement savings, and ultimately financial stability in your golden years. As a result, it pays to understand your options well, and make sure you've got the right account type for your situation:

401(k) vs. Roth 401(k)

Retirement Planning

9 mins

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