Friends Selling 401k to Avoid Work

A job today does not mean security. Any business can move and relocate. Outsourcing is the culprit. A report shows that as of July 2008 nearly 400,000 jobs have been lost. Even though a job layoff is bad for anyone, it is especially bad for single women and single parents. Over 700 people in Western Union's St Louis call center will loose their job as of July 2008. Over 95% of the employees are women under retirement age and many want to liquidate their 401(k) retirement plan.

It's taken 10 grueling years to convince co-workers to invest in the company's 401(k) plan. Owning a home and children kept many single parents from being able to invest. Other singles without children claimed they couldn't afford to save and would rather buy cars. Younger employees were too busy "living for the weekend" to take advantage of the free money given away by their employer. The employees investing in the 401(k) plan were overly cautious and wanted only to invest safely in the bonds and money market accounts. Now that the company has closed its doors, my friends plan to liquidate their 401(k) plan and remain unemployed for 6-8 months. Increasing unemployment compensation to 6 months has been a motivation for the new found unemployed.

Saving, budgeting, planning, and money management are excellent skills to acquire. They don't mean anything if you have the wrong objective. An adequate emergency fund will pay expenses for 3-6 months. You will need to use this fund if you loose your job.

I want to share a true story about my friend and the wrong objective.

My best friend is a 56 years old single uneducated female. She has convinced herself that she will not be able to get another job paying as well. Women historically are paid less than men. Although she manages money well and has a sizable savings account, she has a second mortgage and car note. She wants to pay off these two bills so that she can better support herself with a lower paying job. Even though she is single and buying her home for the past 7 years, her unemployed son and 2 grand children (ages 17 and 2) live with her.

My friend is considering liquidating her 401(k) plan as her solution to reach the objective; reduce her debt and be unemployed for 6-8 months. She needs a break from work is the explanation given. She doesn't want to look for work until the March - 2009. She doesn't think that her savings account and unemployment will be adequate to maintain her expenses for the time she's off work.

My friend is currently shopping for a used car for her 17 yr. old grandson. I've declined to go on car shopping trips with her. I've told her that I don't think it's a good idea to buy a used car for someone who is unemployed. I've explained that car repairs are costly and very likely for an older car. This will place an additional burden on her since the grandson is unemployed. I've also advised against liquidating the 401(k) plan to pay off her second mortgage. I have suggested that she incorporates "tough love" concepts such as children go and find a job. Nothing in life is free. Make everyone work and contribute monthly to the household expenses.

In conclusion, this is a catastrophe waiting to happen. This has failure written all over it. Although she will be taking a break now, she'll have to work longer because of liquidating her 401(k) plan. This is a very bad time to liquidate since the market has significantly fallen. My prayer: God, how to you keep someone from making this mistake?