Sarah Johnson has borrowed from her retirement account several times – once to buy her first home and another time to cover unexpected medical bills. She repaid the loans – often ahead of schedule, but when the pandemic hit and she found herself unemployed and in financial crisis, she did the unthinkable.
“I withdrew what was left of my retirement accounts,” said the 58-year-old marketing representative from Rochester, New York. “It’s not like I have money parked elsewhere.”
Johnson, who took advantage of 2020 legislation that allowed 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 in four adults age 25 and older dipped into their retirement savings or stopped contributing to their retirement account during the height of the pandemic.
One earlier Kiplinger survey (conducted in partnership with Personal Capital) slightly older workers revealed even larger numbers. About a third of respondents said they had taken out a loan or made an early withdrawal from their retirement account.
“A lot of people did it because they needed money for basic expenses” due to loss of income and/or other reasons, said Rafael Rubio, president of Stable Retirement Planners, which helps individuals develop their retirement plans.
That number could grow, Rubio said.
“With ‘The Great Resignation’ now, more people will be tempted to dip into their retirement savings to make ends meet,” he said.
Small business expert Dennis Consorte agreed. Plus, “with two in five Americans planning to start a business this year, a good chunk will likely draw from their retirement accounts to fund those ventures,” he added.
Those remaining in the traditional workforce are likely to invest less in their requirements plan — if anything at all — given the inflationary environment, Rubio said. “With rising costs for everything and inflation eating away at wages, the masses may feel they need to pay themselves now rather than investing in their future.”
The consequences are significant, especially since more than half of Americans (52%) say they are behind on their retirement savings, according to a recent Bankrate poll.
“Every $1,000 you withdraw from your account in your 20s can be $15,000 less than what you have in retirement,” said Greg McBride, chief financial analyst at Bankrate. “Giving up on growth has a big impact on your future.”
Money that is taken out of retirement accounts is rarely replenished, McBride added. “Often, those trying to get back on their feet financially have to rebuild emergency savings, pay off other debts, or repay family or friends they borrowed from before they even start thinking about rebuilding their retirement funds. “
‘Live for today’
Moreover, a new attitude emerges. While the pandemic has underscored the importance of emergency savings (and prompted some workers to save more money), it has also placed greater emphasis on living in the moment.
“People have come to terms with their mortality,” Consorte said. “They want to be more ‘present’ and live for today.”
Ask Matt Osborne, 42, of Dallas, Texas. After eight years of contributing to his 401k regularly (and dipping into it twice), he recently cashed it out, deposited the half he cleared after taxes and penalties into a basic savings account, and bought a whole life insurance policy.
“My wife and I were looking for a different approach that would give us the freedom to do more and give us the flexibility to work or not,” he said. “I like that we can take out a loan on the policy, pay the money back at our own pace, and grow our money more efficiently.”
“I also like that in a world where nothing is guaranteed, we are guaranteed a certain payout until I am 105,” he added.
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