28% of Workers Dip Into Retirement Funds Amid Pandemic

Millennials are the most likely to tap savings, survey finds

Exhausted young man rubbing eyes in front of a computer.
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The United States isn’t known for offering a secure retirement, and the pandemic isn’t helping. More than a quarter of workers have taken or plan to take a loan or withdrawal from their retirement accounts because of the pandemic, according to a June survey from the Transamerica Center for Retirement Studies. At the same time, Social Security funds have taken a hit, lowering the funds’ reserves even further.

“Millions of people have been very hard hit by the pandemic, and I can see the need to dip into retirement savings,” said Patti Vogt Rowey, vice president of Transamerica Institute. Rowey also acts as a retirement and market trends expert for the Transamerica Center for Retirement Studies. “But certainly those who do have the means should continue to save.”

Key Takeaways

  • American workers regularly use retirement savings as stop-gap funds.
  • More than a quarter of workers cite the pandemic as the reason for taking or planning to take loans or early withdrawals from retirement accounts to cover expenses during the pandemic.
  • Millennials are the most likely to tap their retirement funds early.
  • Multiple surveys show a drop in people’s confidence that they will be able to retire comfortably because of the pandemic.

Using Retirement Accounts as Emergency Savings

Though the economic turmoil resulting from the pandemic has given people a reason to use their retirement savings during their working years, it’s not unusual for them to do so. About a third of American workers make early withdrawals or take loans from their retirement funds each year, according to the last few years of the Transamerica Center for Retirement Savings annual retirement survey. 

While it’s not uncommon for people to take a hardship withdrawal from a 401(k) or similar plan, Rowey said she believes COVID-19 has “exacerbated” these circumstances. 

Transamerica’s survey of 1,260 U.S. adults showed 28% have either already taken out a loan or early withdrawal from a 401(k), IRA, or similar retirement account, or plan to do so. 

Millennials were more likely than those older generations to dip into their retirement savings, with 37% of millennial workers saying they had or plan to do so. (The organization conducted the survey in June and provided The Balance additional insights in October.) Older workers seem much less likely to take such action: 24% of Gen Xers and 8% of baby boomers have or plan to make early use of retirement savings because of COVID-19, the survey shows.

Experts generally warn against using retirement funds during working years, not only because it hampers your overall savings but also because early withdrawals may incur tax penalties. But there is a small silver lining to using them now: The CARES Act suspended the tax penalty for early withdrawals and increased the amount people could withdraw or borrow from tax-advantaged retirement vehicles.

Still, the impact of tapping into retirement savings early could be significant, especially for younger people. For those with a 401(k) plan, the decision to stop contributing may also mean no longer receiving free money in the form of an employer match. Additionally, anybody who withdraws early loses the compounding growth that a long-term retirement savings fund provides. 

Nonetheless, David Stinnett, principal and head of Strategic Retirement Consulting at Vanguard, said those who withdraw funds early do have the opportunity to make up that compounding growth in the future. One way to do that is to increase how much you save by 1% next year.

“The long-term impact can be very minimal if you don’t wait too long to close that gap,” he said.

Retirement Confidence Also Takes a Hit

While people draw down their accounts early, they’re doing so with anxiety about the future. The same Transamerica survey found that 22% of workers lost confidence in their ability to retire comfortably as a result of the pandemic, compared to 18% whose outlook improved. 

Another report highlighted this trend: 58% of people surveyed in September by financial tools provider SimplyWise said they are more concerned about retirement now than they were last year. The same SimplyWise survey showed that a lot of people’s retirement anxiety stems from uncertainty about Social Security. Fifty-seven percent of people not yet drawing on Social Security benefits have concerns the program will run out of money. Fifty-four percent of people already getting Social Security share that concern, up from 29% in July.

They have good reasons for those worries.

A May report from The Wharton School at the University of Pennsylvania found that the trust funds could run dry as early as 2032, down from the Social Security Administration’s pre-pandemic baseline of 2035. At that point, the system will be able to pay 79% of promised benefits, the SSA said, and the remainder will come from payroll taxes paid by employers and employees.

Early retirement as a result of the pandemic has strained the system. Fourteen percent of people have filed for or expect to file for Social Security earlier than planned due to COVID-19, according to a July poll from the Nationwide Retirement Institute. Meanwhile, 61% of people polled said they worry more now than they did before about Social Security running out of funding.

Saving for Retirement Amid Uncertainty

The recommended retirement savings amount for someone in their 60s is approximately $522,000, based on the 2019 median income of 55-64-year-olds, and many financial experts recommend aiming even higher. But the average American retirement savings for people in their late 50s and early 60s is only $243,559, according to a 2019 analysis by the Economic Policy Institute. The median retirement savings among 56- to 61-year-olds is a bleak $21,000, underscoring the need for more saving, not less.

As hard as it may be to imagine saving more during times of economic instability, experts stress the importance of prioritizing it for yourself and your family. Talking about retirement savings could be difficult, especially when approaching a family member or friend to suggest it might be time they start the process.

“Those conversations are definitely difficult, especially if you’ve been functioning a certain way in your life and need to make a change,” said Avani Ramnani, director of Financial Planning and Wealth Management at Francis Financial. “Everybody at a conceptual level knows they need to save for retirement, but often clients don’t know what that number is and how to get there.”

Transamerica reported that a fifth of workers say they never discuss saving, investing, and planning for retirement with family and close friends, while a little more than half of workers occasionally discuss the topic.  

Ramnani said having a conversation about a person’s values regarding money can help break the barrier and shed light on “what emotions are attached to your money,” whether that be guilt, shame, or any preconceived notions. “Digging into that background always helps bring up the core issues and then the conversation gets easier,” she said. 

You can practice navigating the sometimes awkward conversation around retirement savings using Money Talks. It’s an interactive tool designed to help anyone who thinks a family member or loved one may not be saving enough for retirement have a productive and encouraging conversation about savings.  

Don’t Forget the Emergency Fund

Experts recommend people build an emergency fund in parallel with a retirement plan to satisfy unforeseen needs without sacrificing future stability.

“2020 has shown there are many reasons why you should save for an emergency fund,” Transamerica’s Rowey said, referring to COVID-19, the wildfires in California, and the storms hitting the Gulf Coast. 

People should save the equivalent of about six months’ worth of expenses to protect themselves from shocks like losing a job or needing to make an unexpected house repair, experts say.

“That amount can be daunting for many people, so I say to save what you can because a little bit can add up over time,” Rowey said, noting that people should prioritize meeting their employer match in the 401(k) and then putting additional savings into the emergency fund. For those who are currently unemployed, consider opening an IRA.

Ramnani warned against lessening contributions to retirement plans in order to add to emergency reserves just because of the pandemic.

“Don’t make long-term decisions based on a short-term issue,” she said, noting that the pandemic is short-term based on a lifespan, even if it feels like it’s lasting a long time.

If people aren’t currently in a position to save for retirement, they should “make a pact with themselves” to start saving as soon as they are able, Rowey said. She suggests starting with a written plan and then holding yourself accountable.

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