A large number of Americans have been withdrawing significant amounts of money from their retirement accounts to cover daily living expenses since the pandemic hit, according to Personal Capital, a digital wealth management company.
The impact of those withdrawals has the potential to hamper people’s ability to retire far into the future, Amin Dabit, vice president of advisory services at Personal Capital, said in an interview today.
One-third of Americans withdrew or borrowed money from an IRA or 401(k) during the pandemic, and nearly two-thirds of those who withdrew funds used the retirement savings to cover basic living expenses, according to the Personal Capital survey released today. The survey included 744 people between the ages of 40 and 74 who were still working and had at least $50,000 in retirement savings. The survey was co-sponsored by Kiplinger, a personal finance and business forecasting organization.
“Withdrawing money from a retirement account should be a very last resort when someone needs money,” Dabit said. “The money should be replaced as soon as possible. By withdrawing money, the person is losing the compounding they should receive and they are disadvantaging their future selves.”
The survey, which was conducted in November, showed the amounts people withdrew or borrowed were significant. Thirty-two percent of respondents said they withdrew $75,000 or more from a retirement account, while 58% of those who took loans borrowed between $50,000 and $100,000. Additionally, more than a third said they now plan to work longer due to the financial impact the pandemic has had on their plans for retirement, according to the survey.
“Last year presented many challenges,” Jay Shah, president of Personal Capital, said in a statement. “The pandemic not only created a global health crisis, it impacted the financial outlooks and retirement plans of many.” Dabit added that the most important thing to do in financially troubling times is to develop a financial plan.
People who withdrew or borrowed money from retirement plans said they used the funds for home repairs, auto repairs, tuition expenses or to help family members. Under the federal financial stimulus packages already enacted, retirement plan holders under the age of 59.5 who were affected by the coronavirus can take a distribution of up to $100,000 from an IRA, 401(k), or similar account without penalty. They also can take loans of up to $100,000.
Pandemic-induced market volatility left nearly three-quarters of respondents "somewhat" to "very worried" about their investments.
At the same time that many retirement plan holders are withdrawing money from their savings, the total value of retirement plans is increasing due to market increases, Dabit said. The average balance for retirement plan holders was $358,000 as of the end of June 2020, an increase from $351, as of the end of March, Personal Capital said.
Although a savings of $358,000 may seem substantial, for those near retirement “that total will not last long in a retirement that may last 20 or 30 years,” Dabit said.
“The pandemic has turned lives upside down, which often causes a sense of uncertainty or doubt,” Personal Capital said. “An earlier survey taken by Personal Capital in June of more than 1,000 adults showed 89% of people were worried about the financial impact Covid-19 would have on their retirement.”