Sarah Johnson has borrowed against her retirement account several times – once to buy her first home, and another time to cover unexpected medical bills. She paid the loans back – often ahead of the due dates, but when the pandemic hit and she found herself unemployed and in a financial crisis, she did the unthinkable.
“I pulled what I had left out of my retirement accounts,” said the 58-year old marketing rep from Rochester, New York. “It’s not like I had money parked anywhere else.”
Johnson, who took advantage of the 2020 legislation that allowed for penalty-free coronavirus-related withdrawals of up to $100,000 from IRAs, 401(k)s and other qualified retirement accounts, is not alone.
According to an AARP survey last year, one out of every 4 adults ages 25 and older either dipped into their retirement savings or stopped contributing to their retirement accounts during the height of the pandemic.
An earlier Kiplinger survey (conducted in partnership with Personal Capital) of slightly older workers revealed even larger numbers. About one-third of respondents reported either taking out a loan or an early withdrawal from their retirement account.
“A lot of people did this because they needed money for basic expenses” due to lost income and/or other reasons, said Rafael Rubio, president of Stable Retirement Planners, which helps individuals map out their retirement plans.
This number could escalate, Rubio said.
“With ‘The Great Resignation’ going on right now, more people will be tempted to raid their retirement savings to help make ends meet,” he said.
Small business expert Dennis Consorte agreed. Furthermore, “with two in five Americans planning on starting a business this year, a good portion will likely pull from their retirement accounts to fund these ventures,” he added.
Mature man in his 40s holding open sign on door of business, looking through window, optimism, aspiration, resilience
Those who remain in the traditional workforce will likely put less into their requirement plan —if anything at all — given the inflationary environment, said Rubio. “With costs rising for everything and inflation eating away at wages, the masses may feel they have to pay themselves now rather invest in their future.”
The consequences are significant, especially since more than half of Americans (52%) say they’re behind on retirement savings, according to a recent survey from Bankrate.
“Every $1000 you take out of your account in your 20s can be $15,000 less that you have in retirement,” said Greg McBride, chief financial analyst at Bankrate. “Forgoing growth has a big impact on your future.”
Money that gets pulled from retirement accounts rarely gets replenished, added McBride. “Often those who are trying to get back on their feet financially have to rebuild emergency savings, pay down other debt, or repay family or friends they borrowed from before they can even start thinking about replenishing their retirement funds.”
Plus, there is a new attitude emerging. Even though the pandemic underscored the importance of emergency savings (and prompted some workers to save more money), it also put a greater emphasis on living in the moment.
“People came to terms with their mortality,” said Consorte. “They want to be more ‘present’ and live for today.”
Just ask 42-year old Matt Osborne of Dallas, Texas. After eight years of contributing regularly to his 401k (and dipping into it on two separate occasions), he recently cashed it out, deposited the half he cleared after taxes and penalties into a basic savings account, and bought a whole life policy.
“My wife and I were looking for a different approach that would give us the freedom to do more, and give us the option of whether to work or not work,” he said. “I like the fact that we can take out a loan against the policy, pay the money back at our own pace, and make our money work more effectively.”
“I also like that in a world where nothing is guaranteed, we are guaranteed a certain payout until I’m like 105 years old,” he added.
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