I know a couple of stories about people pulling money out of the 401K early -- all of them bad stories:
- When I was in college I occasionally "temped" for a small company. I can't really remember what they made, but they hired lots of manual laborers. One of the benefits the company offered was a 401K plan . . . and somehow 100% of the employees built up funds -- perhaps the company was automatically depositing for them, or perhaps they automatically deducted a portion of the employee's pay? Anyway, the company was forced to provide a statement to the employees every so often . . . and EVERY TIME they did that, a bunch of employees would see the number and decide to retire. Example: "Wow, I have $3000! I'm going to retire!" They'd blow through the money in a month or two, and then they'd be back knocking on the company's door. The boss must've been frugal, and he was sooo upset by this. He lectured me on it, and it was one of the things that made me start reading about investments when I was still in college.
- After I finished my first degree, I worked for a short time in the office of a construction company. They started pushing 401Ks to the employees, and a few of them signed up. They were VERY CAREFUL to explain that this was money set aside for retirement, you can't get it out for a while, etc., etc., etc. Well, sure enough, a year or so later one of the crew chiefs decided he wanted to build a garage . . . and he asked for his money. He was ROYALLY PISSED that he couldn't just deduct it as if it were in a savings account. Even when showed where he'd signed off saying that he understood the purpose, he just kept yelling, "It's my money! Why can't I have it when I want it?"
- A casual friend told me that he took money out of his 401K to pay for his son's college expenses. He warned me very seriously NOT to do it, explaining that not only did he have to pay a fine to take the money out, but the money counted as income . . . and it bumped her up to a higher tax bracket. Apparently it cost her BIG to send him to college. I sat there and listened very politely -- as if this were all news to me -- and I didn't mention that we SAVED AHEAD OF TIME and didn't need to worry about where our kids' college expenses would come from.
- A girl I used to work with taught in another state for a pretty good amount of time -- I'll say 10 years. And when she left, she cashed out all her retirement. Now she's started "from scratch" here in our state, and she realizes that she's essentially getting a late start -- it's as if she didn't start saving until her mid-30s.