Experts predict more workers will use 401(k)s to prepare for economic emergencies as more Americans ravage their retirement accounts as the cost of living soars. A combination of factors, such as new rules that make it easier to withdraw money and high inflation that weighs on household budgets, could add to the increase.
“The cost of living is just so high these days, and that’s putting participants on edge,” said Craig Reed, national retirement practice leader at Marsh McLennan Agency, a workplace benefits company. “Some of it still spills over from the COVID-19 pandemic.
Mark Schaaf, an information technology worker in New York City, has withdrawn from his retirement account three times since the 2008 recession. He pulled out more than $50,000 to pay off credit card debt, six children attending religious school, and most recently an overdue mortgage.
“It was really a choice between saving the present and securing the future,” he says. “My situation was no frivolous person. My expenses were more than I earned.”
Mr. Schaaf, 55, who now works in the public sector and pays a pension, calculates that if he retires at 70, he can withdraw 40 percent of his previous salary. His retirement account has acted as a circuit breaker to reset his debt, but he is relieved that he has no option to withdraw his pension premiums.
“I don’t want to do that anymore, so I try not to force it,” he said.
Mr. Schaaf has many friends, especially these days. Two major retirement plan managers, Fidelity and Vanguard, have observed an increase in withdrawals in difficult circumstances.urgent financial needaccording to the Internal Revenue Service. Fidelity found that 2.4% of the 22 million people with retirement accounts in its system had a difficult withdrawal in the final quarter of 2022, up 0.5 percentage points from the same period last year. A similar analysis by Vanguard found that 2.8% of the 5 million people with retirement accounts had difficulty making withdrawals last year, up from 2.1% the year before.
In the first three months of 2023, the number of people using indigent withdrawals increased 33% year-over-year, with employees withdrawing an average of $5,100 per person, according to Bank of America research. It is said that
“Customers have long been aware that their retirement accounts are not sacred,” said Steve Parrish, an adjunct professor at the American College of Financial Services and co-director of the Center for Retirement Income. rice field. “That trend has already started. People are starting to realize that their 401(k) won’t be locked until he’s 60.”
Some experts point out that many American families are struggling with rising costs and warn that this may be just the tip of the iceberg. The personal savings rate hit a high of nearly 34% in April 2020 due to the impact of the coronavirus lockdown and stimulus measures, but has been declining since then. up to about 5 percentaccording to the U.S. Bureau of Economic Analysis.
Kirsten Hunter-Petersson, vice president of thought leadership for workplace investments at Fidelity, said, “The overall increase in withdrawals for the needy suggests that people are generally not making enough short-term savings. It shows that we don’t have it in the world,” he said. “People may have to look to their retirement accounts when there are inevitable unexpected expenses,” she says.
Additionally, people are often required to withdraw more money than they need to cover federal income taxes, and are subject to early withdrawal penalties of 10% if they do not qualify for the exemption.Exemption can grant Applies to limited circumstances such as death or permanent disability.
“The cost of living is clearly pushing clients to the limit at this point,” said Sarah Honsinger, a credit counselor at the nonprofit debt management group Aplisen.
Hongsinger added that the CARES Act, which in 2020 temporarily eased restrictions on withdrawals for the needy, has sparked an increase in withdrawals from retirement accounts.
Lawrence Delva Gonzalez runs the Personal Finance Blog. financial institution near mesaid he observed people in his Haitian-American community in his hometown of Miami turn to the nest egg during the worst of the Covid-19 pandemic, with no apparent long-term impact.
“When it comes to the pandemic, when rumors circulated that they could withdraw funds early without penalties, they did,” he said.
Delva Gonzalez said he is concerned that a lack of financial literacy is putting marginalized workers like them at risk. “My community is almost inaccessible,” he said.
With no retirement benefits, these workers face a bleak future.
“People pushing 64, 65 are basically out of options,” he says. “They have no savings and are left with retirement debt.”
Delba Gonzalez, 40, said the impact could spill over into the next generation, citing his own family as an example.
“My wife and I already know that we’re probably going to be supporting my mother and her mother and father,” he said, estimating the cost would be thousands of dollars a month. . “There are only so many things you can do after your own retirement before you cut back on your lifestyle and your ability to build a family.”
Better access to planning and money
The Secure 2.0 Act, which passed Congress last year, aims to increase workers’ access to retirement benefits, primarily by making it easier for companies to offer 401(k) plans. It also cuts down on the red tape employees face when withdrawing money from retirement accounts, and adds a list of conditions that exempt the 10% fine on money withdrawn if the owner is under the age of 59.5. Enlarged.
Retirement experts see the bill as a double-edged sword.
“It would be great if Congress did something to get more employers to offer eligible plans,” said Parrish of the American University of Financial Services. “On the consumer side, I’m concerned that access is a little too easy. Great, you can make money, but you can only retire once.”
Withdrawing money from a retirement account has a significant impact on a person’s future financial security as the money is no longer invested and returns are doubled. Even those who consider themselves to be financially well off admit that it’s difficult to fully grasp the impact of retirement on the nest egg decades down the road.
General advice for 401(k) owners looking to withdraw money is to take out a loan against the account instead. But even such loans can backfire, as Ashley Patrick discovered. Ten years ago, she and her husband borrowed $24,000 from his 401(k) to renovate her home near Charlotte, North Carolina, but her husband’s layoffs left her The repayment plan went crazy.
Borrowers get a five-year repayment period as long as they remain with their employer. But if they lose their jobs or quit their jobs, borrowers must pay off their loans by the next year’s tax filing deadline. If you miss that deadline, the IRS will treat the distribution as a withdrawal and apply taxes and penalties.
“I didn’t have the money. I already spent it,” said Patrick, 38.
The following April, the couple faced a tax bill of $6,000. But the bigger loss, Patrick said, was the missed opportunity to keep the money invested.
“We were in our 20s when we did this, so it would have taken a very long time to grow up and get that compound,” she said. “I never thought about long-term costs until I started learning about finance.”
401(k) as an alternative to savings
Retirement planning experts say one of the reasons for the current increase in withdrawals is that many workers, including low-income and historically disadvantaged workers, hold 401(k)s and use them as emergency funds to retire. This is because they are more likely to rely on savings, he said.
“The increase we’ve observed highlights and highlights the importance of emergency savings accounts as a first line of defense,” said Fiona Greig, global head of investor research and policy at Vanguard. “Historically, we’ve found that those who withdraw hard-to-find funds tend to be low-income workers.”
Greig said one reason people put money into retirement savings is to avoid evictions and foreclosures. “I’m starting to wonder if low-income families are having more trouble,” she says.
Low-income workers are particularly in need of 401(k) financial security after retirement because they are likely to have lower social security benefits and more physically demanding jobs that become more difficult to perform with age. increase.
One possible solution, some experts say, is to allow employers to open emergency savings accounts for employees linked to 401(k) accounts. The Secure 2.0 law includes provisions that allow retirement plan sponsors to open so-called sidecar accounts from 2024. Workers can donate a little of their after-tax earnings at a time, up to $2,500, and the funds will be withdrawn without penalty.
Sid Payra, chief executive of Sunnyday Fund, a financial technology company that helps workers set up emergency funds, said the change would help lower-income workers who might otherwise draw emergency funds from their 401(k). said it would be of benefit to
Paila, 35, said she can relate to that kind of financial stress.
“My experience was pretty early in my life in America,” he said.
When his parents lost their jobs in the dot-com collapse of the 1990s, not long after his family immigrated from India, Pyra recalled guiding his parents, who spoke little English, through the complex process of early withdrawal of a 401(k). He remembered it vividly. .
“I was about twelve years old,” he said. “I was definitely hurt by that.”
