Workers use retirement savings as a last resort

About a month after the start of the pandemic, Tyler Mathiesen lost his job at a tech company, his first full-time job out of college. For several months, everything was fine: his $ 75,000 student loan payments were suspended, and the additional $ 600 in weekly federal unemployment benefits helped pay off the rest. He even managed to save some money.

But at the end of the summer, the extra allowance expired and her regular state unemployment benefits were about to run out. He needed a plan, and fast.

His solution: empty the $ 8,200 he had in his 401 (k).

“I needed the money to pay the rent and the food,” said Mr. Mathiesen, 24, who lives with his girlfriend in St. Paul, Minn. it was my only realistic way to get the money I needed.

Since the pandemic began to impact the economy in March, more than 2.1 million Americans have withdrawn money from retirement plans at the top five 401 (k) plan administrators – Fidelity, Empower Retirement, Vanguard, Alight Solutions and Principal. These workers, especially those in hard-hit sectors like transportation, manufacturing and healthcare, have been aided by more flexible opt-out rules created by the coronavirus relief legislation known as the CARES Act.

Even with millions unemployed and an economic recovery at best fragile, this only represents about 5% of eligible 401 (k) and 403 (b) customers across all of these businesses. But it’s still higher than in a more typical year, when many participants can still generally withdraw money for hardship, albeit under a stricter set of rules.

The various federal aid programs put in place – including stimulus payments, more generous unemployment benefits and the suspension of federal student loan payments – have helped limit the damage, pension experts said. But some of these programs are already sold out, or may soon.

“As these begin to expire, there may be a slight increase in withdrawals for households that have been financially impacted,” said David Fairburn, associate partner at Aon, a professional services firm that provides advice on such matters. of retirement. “For example, maybe the spouse of an active employee lost their job, then a withdrawal would be useful to make up for the loss of household income.”

Usually, withdrawing money from a tax-deferred account before the age of 59 and a half would incur a 10% penalty on top of any income tax. But under the temporary rules part of the CARES law, people with financial problems related to the pandemic can withdraw up to $ 100,000 from any combination of their tax-deferred plans, including 401 (k), 403 (b), 457 (b) and traditional individual retirement accounts – without penalty. The rules only apply to plans if your employer signs up and they expire on December 30.

Some plans already allowed hardship withdrawals under certain conditions, and the rules for these have been relaxed a bit. in 2019. But the rules of the CARES law are even more lenient: Withdrawals in the event of hardship related to the virus are still treated as taxable income, but the liability is automatically spread over three years, unless the account holder decides. otherwise. And tax can be avoided if the money is put back into a tax-deferred account within three years.

At Fidelity, the largest pension plan provider, about 1.4 million members made coronavirus-related withdrawals through November 21, or about 5.6% of eligible plan members. About 2.2% of participants per year have made traditional hardship withdrawals in recent years, Fidelity said.

The average total withdrawal this year was around $ 20,000, often spread over two or three trades. This is more than three times the typical hardship withdrawal – less than $ 6,000 over a 12 month period – in recent years.

“People take exactly what they need and they try to minimize the impact on their overall savings,” said Jeanne Thompson, senior vice president of workplace consulting at Fidelity. “It is recognized that 401 (k) will be their main source of income, and people don’t want to plunder it unless they have to.”

Other large 401 (k) workplace vendors have witnessed similar behavior. Vanguard – with five million plan participants in total – said 5.3% of people with a coronavirus-related opt-out took one until November 30, with an average amount of $ 23,900. About 3.2 percent of eligible participants, on average, made a traditional hardship withdrawal over the past five years, with an average withdrawal of $ 7,351.

At Principal, about 5.7% of the 2.6 million participants with an available coronavirus-related distribution option took one through November 30, with an average withdrawal of $ 16,500. Most of them had balances below $ 25,000, and workers in manufacturing, healthcare and professional / scientific industries made the most claims, the company said.

(Individual retirement accounts can also be tapped, but experts said detailed withdrawal data will only be available after these people file their tax returns.)

There’s a good reason a lot of people haven’t made withdrawals: Those who need cash the most right now don’t have the luxury of an account to loot.

Only about half of households have balances in 401 (k) plans or individual retirement accounts, according to Boston College’s Center for Retirement Research. And the lowest-paid workers without a pension plan have suffered a disproportionate share of job losses linked to the pandemic, experts said.

The momentum has further highlighted the fact that few households have emergency savings accounts – and this has prompted more employers to launch their own programs. So far, according to Aon, about 10% of large employers offer some type of support to encourage saving for rainy days, whether it’s a way to put money aside in a pension plan or simply to study.

But the scale of the damage caused by the pandemic means that even the traditional emergency savings advice – setting aside about three to six months for basic living expenses – was not necessarily enough to provide a cushion. Someone who lost their job in March could easily have spent that amount of savings.

While pandemic-related withdrawals come with fewer penalties, they still hurt a person’s retirement savings. How aggressively they need to save to make up the difference will depend on their time horizon, income, and how much they have withdrawn.

Consider a 43-year-old man earning $ 62,000 who withdrew about $ 10,400 – the typical participant who had made a withdrawal until May, according to Vanguard analysis. That missing $ 10,000 would have grown to around $ 25,000 over the next 24 years, assuming a 4% return on investment after inflation. To fill the gap, people in this situation would have to increase their savings rate by one percentage point per year.

But those who have had to make a withdrawal may not be able to replenish their savings for a period of time, and the longer they have to wait to start saving again, the more aggressive they need to be.

Younger people, like Mr. Mathiesen, have more time to catch up. Despite this, he worries about how long it will take him to get back to work, preferably in his field of study – audio engineering and sound design.

Although he has had a few leads, Mr. Mathiesen is trying to find a job where he can work from home indefinitely. He said his partner suffered from a rare autoimmune disease, which would put her at greater risk if she contracted the coronavirus.

And other uncertainties abound: Mr Mathiesen is unsure whether negotiations in Washington will bring back more lucrative or extended unemployment benefits, and his student loan bills will have to be paid again from February if the moratorium on those payments fails. is not extended further.

“I’m young enough that I can reset and that wouldn’t put me too far behind,” he said. “But I don’t even know when I can start to improve again either. “