Today is a Saturday, which most weekends means yard work, home projects (which I plan to write about in the future), or various other chores. On days like today, when it is both cold and rainy, we instead often run errands. I’ve been prepping for a while for a home project I plan to do before summer, and as part of that, I needed to run to the local home improvement store. As part of our weekend errand runs, we will often go out to eat lunch or breakfast. Today we decided to go out for lunch.
Of course, when we do go out to eat, we spend most of the time talking about whatever is of interest, and this time we spent most of our time talking about starting this blog. That also meant talking about FIRE and plans for this year.
When we sat down, there was a guy sitting in the booth behind Sarah. He was by himself and reading something on his phone. It was clear he had been there for a while, and he eventually got up and left. Three women took his place at the booth. My guess is they were related, maybe grandmother-mother-daughter, but I honestly am not sure. After they had been there for a while, Sarah stopped our conversation and said quietly to me “They are talking about 401k’s”. And so, we became unexpected eavesdroppers.
To be more precise, the oldest of the three women started talking about her 401k. I’m a poor judge of age, but I would say she was in her mid-50’s. Here are some of the things we overheard:
- She planned to withdraw, as a loan, about half of her 401k
- She was going to withdraw $20,000
- She planned to buy a car
- She planned to make a mortgage payment
- Her house needed repairs. There was some sort of water leak, and at least drywall and flooring needed replacing (probably more)
- She hoped to have $900 for something. I couldn’t make it out, but Sarah thought she wanted that for an above ground pool
I certainly don’t know her entire financial situation, but I am a bit concerned for her from what I overheard. Let’s break it down.
If she planned to withdraw $20,000 and that was half of what was in her 401k, then she has $40,000 saved in her 401k. If she is indeed in her mid-50’s, then we can do a rough estimate on where she is on the road to retirement.
Maryland’s median household income in 2015 was $75,847. So let’s run with that. As a quick calculation, for a basic retirement at age 67, Fidelity recommends having 7 times one’s salary by age 55. So on the median, a Maryland household around age 55 should have $530,929 saved for retirement. The household income I believe assumes two wage earners, so her half of the savings would be $265,454.50. If she indeed has only $40,000 saved in her 401k and assuming that is her only savings, then she is only 15% of where she should be. If she is going to withdraw $20,000, then that would leave her at just 7.5% of where she should be on the road to retirement.
Let’s look at the things she planned to use the money for.
I generally consider a car a necessity. My first two years of college I only had a bicycle (and my first college job was 30 miles away!). So I’ve been down the road of not having a car, and it’s not very practical. The average cost of a vehicle in the U.S. is $33,543 with various other fees being added on top of that. In terms of fees, Maryland is the 46th worst state in the country with an average addition of $12,926 in fees and costs. So, one will need to work very hard to fit in a new car under $20,000 here in Maryland.
When I was at lunch, I thought there was a way to use a loan against a 401k to help with mortgage costs or home repairs. Though, in looking that up, it appears it is only advantageous to do so with IRA’s.
Last but not least, the above ground pool. According to homeadvisor, an average 12′ above ground pool costs $1,030. I believe one could find a deal for $900, so this is at least in the realm of possibility of what Sarah heard.
Taking that all in, I hope very much for this woman that we misunderstood what we eavesdropped, or that her financial situation is way better than it sounded. I hope she is only withdrawing money from a 401k as a last resort and that these are necessities, but in particular, the pool didn’t sound that way.
I talked a bit about mind-boggling money decisions in our About Us page, and so for the time being, I’m classifying this eavesdropping well within that category of mind-boggledness.