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The 401(k) Lesson from “Project Runway”
By Molly's Brother | July 29, 2006
Who knew that a reality show like Bravo’s “Project Runway” would touch on a personal finance issue and beget an important lesson regarding your 401(k)? With my newest television obsession I continue to apply the basics of personal finance to the contestants’ lives.
“Project Runway” is one of the best reality shows out there solely because it relies on contestants having some level of talent to stay alive in the show–unlike “Survivor” and its myriad clones that rely heavily on manipulation and deceit. Granted, there’s manipulation on “Project Runway.” But in order to impress the judges, the contestants need the talent to design an original outfit and and the ability to create it flawlessly. In fact, once the season ends, their careers depend on it.
If you haven’t seen the show, I suggest you watch it. I’ve never had even a tepid interest in the fashion industry (still don’t), but I happened upon this show one night in its first season. I was immediately hooked. I’m stunned at how passionate people are about fashion. It is a fascinating peek behind the curtain.
The Personal Finance Lesson I Learned
In this year’s first episode, one of the cardinal rules of personal finance was violated (specifically regarding retirement).
Vincent Libretti was a fashion designer in New York City during the 1980s. He had received some level of success designing and selling his clothes. Admittedly, he was too young to handle the pressure and had a minor crisis, causing him to close his shop and retreat from the industry.
During the intervening years, he wasn’t able to completely walk away from designing. His mind continued to churn out ideas and he produced clothes on a rather modest scale using a spare room in his home as a studio. In his late 40s and propelled by his passion and his dream–and with a healthy amount of distance between that earlier stressful period of his life and today–Vincent Libretti and his wife decided that he should jump into the choppy waters of the fashion industry.
To jump start his line, he did it to get the necessary capital. That’s right. He cashed out his 401(k).
At this point in the show, my hand flew directly to my forehead. I slapped it. Hard. I must confess, my heart sunk a little for him, too. Why? Because I don’t believe anyone should cash out their 401(k) or devote any amount of their personal wealth to invest in such a risky endeavor. (This sentiment is coming from my days in the film industry where Rule #1 is: Never use your own money.) Especially considering that fashion, like film, is such a risky venture. In all my readings about retirement, time and again, I have learned that one should never touch one’s 401(k) until you need it for retirement.
The Problem
In addition to stealing from your future–and retired–self, here are some reasons why you shouldn’t cash out your 401(k):
- If you take money out before you 59 1/2, you face paying a 10% penalty.
- In addition to the 10% penalty, you owe the IRS taxes on pretax contributions (this comes to another 25%. Right off the bat, you are looking at a 35% loss.
- If you cash out your retirement later in life, it’s difficult to refill that nest egg.
On one level, I am mildly pulling for this guy (although his designs seem to be stuck somewhere between 1986 and 1994). Not only is he likeable, but I want his risk to pay off. However, I would hate to see this one man’s action (cashing out the retirement fund) influence others to do the same thing to follow their dreams.
I’ll keep watching. Honestly, I can’t stop. But I have a few favorites and, for reasons unconnected to the world of personal finance, Vincent Libretti isn’t one of them.
Topics: Lessons Learned, Saving |
July 30th, 2006 at 5:15 pm
You got yourself a .com! Yeay! Looks fab, MB! Me like.
July 30th, 2006 at 5:43 pm
Thank you, Lisa!
July 31st, 2006 at 6:55 am
Some other comments that were left at the old blog re: this post. Enjoy!
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Him said…
His risk has already paid off. Every designer who is elected to be on the show already has good publicity and are all pretty successful after the show.
For him, cashing out was the right decision.
8:28 AM
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Kira said…
I thought the same thing when I heard that - I was like, oh Lordy, if he fails now he’ll be doubly depressed. =)
His designs are a little too not-wearable-in-real-life for me, but I think he’s going to get some good exposure from this even if he doesn’t win, cause he seems like the kind of designer that would get a select few people really excited.
10:51 AM
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ricemutt said…
Hey, seems like quite a few PF bloggers follow Project Runway, whodathunk
I still prefer Season 1 (I love Jay, and Kara Saun’s designs will never be beat), but I had the same reaction as everyone else here when I heard about that 401k withdrawal. Still, many people who end up being successful entrepreneurs do so by doing “foolish” things like take out loans at 22% interest rates (like the Borders stores founders did in the 1980s) because they pretty much have to in order to execute their idea. Such actions aren’t safe or advised, but if you’re going to be successful, sometimes you have to take on a lot of personal risk and possess a certain kind of tunnel vision, a la I-believe-in-my-ridiculous-plan-will-succeed-even-if-everyone-else-doesn’t. For the same reason, many successful entrepreneurs tend not to have finished college. (Again, not the wisest decision for the rest of us to make.)
The flipside is that you seldom hear about the ones who fail.
I agree with Him’s comments above and hope that Vincent will be successful enough just through the publicity from the show. If not as a designer, perhaps in a different but related industry of some sort…maybe dogwear? His personality and humor are definitely unique!
6:15 PM