Mortgaging the future in desperate times

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.

Msnbc.com senior producer John Schoen answers your questions about retirement.

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.

More on retirement | AARP

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