Americans have a reputation for being among the worst savers in the world, but when faced with hard financial decisions, they can preserve what they have with the best of them, a recent report from the Investment Company Institute found.
The short report examined investor behavior during the Covid-19 pandemic, the early days of which were marked by predictions that Americans would be pulling on their retirement savings to weather the storm. But to the contrary, and even despite “favorable” terms for withdrawals (no penalty, higher limits on withdrawal amounts, tax burden spread over three years, etc.), few retirement savers choose that route.
According to ICI’s “Americans’ Financial Response to Covid,” the majority of Americans, 65%, did not take any financial action at all in response to the pandemic. Part of that was due to the fact that many people were able to keep their jobs, but, in addition, stimulus checks covered surprise Covid-related expenses, federal and state agencies ponied up unemployment benefits, and freelancers—the mainstay of the gig economy—were covered by expanded benefits for the first time.
“The stimulus checks really helped, and the expanded unemployment benefits,” said Sarah Holden, ICI’s senior director of retirement and investor research. “Throughout the pandemic ICI has been tracking what's going on with retirement savings, and people really tried to preserve their next egg.”
Among those who did take some kind of financial action in response to Covid, tapping a 401(k)-type retirement account landed fourth on the list of options. Instead, 19% of all survey respondents used emergency savings to tide them over, 18% increased credit card debt, 8% took a loan, and only then did 7% say they took withdrawal from their 401(k). And only 3% took a withdrawal from an IRA, the survey said.
In addition, throughout the pandemic, defined contribution plan participants generally stayed the course with their contributions and allocations.
“There was this sense of ‘First I’m going to emergency savings,’ and so on down the line of options,” Holden said of the investor mindset in an unprecedented time. “Withdrawing retirement funds is really something that people do only when they’ve exhausted everything else.”
To generate this data, ICI combined self-reported actions through regular surveys of what Americans were doing with their retirement assets and administrative recordkeeper data based on actual defined contribution account activity.
“As seen in past instances of financial turmoil and market volatility—such as the global financial crisis of 2007 through 2009—retirement savers seem to initiate a financial triage to address financial pressures. In many cases, other safety valves such as emergency funds are used first—tapping retirement savings tends to be viewed as a last resort. These survey results are consistent with that pattern,” the report stated. “It’s clear that Americans view retirement savings as a special bucket set aside for their golden years.”