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As households struggle to make ends meet, more Americans have been forced to halt or raid their retirement savings in this coronavirus-induced recession.
Nearly 3 in 10 people have decreased the amount of money they’re setting aside for retirement or stopped saving altogether due to the economic fallout of Covid-19, according to a FinanceBuzz survey published in August.
A large share of consumers have also pulled money out of savings.
Around 30% of retirement savers tapped their retirement accounts over the last 60 days, according to a MagnifyMoney survey published in May. Those consumers pulled out $6,757, on average.
Just over half withdrew money in order to cover expenses and 26% did so because of a job loss, according to the survey, which polled 1,239 Americans with retirement accounts.
‘No question’
“There’s no question this is happening, and there’s no question what the reason is: loss of income and fear of loss of income,” said Stephen Brobeck, a senior fellow at the Consumer Federation of America, a consumer advocacy group.
“People think they may be laid off, they may lose hours, and they don’t have any short-term savings or an emergency fund, or it’s a very inadequate one,” Brobeck said.
Unemployment exploded in the early weeks of the coronavirus pandemic to levels unseen since the Great Depression, as state officials shuttered broad swaths of the economy to contain the outbreak.
While the unemployment rate has recovered somewhat, to 8.4% in August, joblessness remains elevated compared with most recessions since World War II.
Meanwhile, a $600-a-week federal subsidy to unemployment benefits that had been propping up household spending, especially for lower earners, lapsed at the end of July. That left some with as little as $5 a week in state aid.
More than 134 million American adults reported having at least a little difficulty paying the usual household expenses over the last seven days, according to a U.S. Census Bureau survey conducted last month. A quarter — about 32 million — said it was “very difficult.”
Six months into the health and economic crisis, nearly 30 million people are still collecting unemployment benefits and more than 1 million file new applications for aid each week.
The number of Americans who’d prefer to work full-time but are forced to work part-time hours is also up by 3.3 million people versus February, according to the Bureau of Labor Statistics.
‘Two-track economy’
Lower-wage workers — who tend to have fewer financial resources at their disposal — were hit hardest by the economic downturn.
The bottom fifth of earners (those making less than $490 a week) saw their jobless rate soar to nearly 20% in May, according to a paper published last month by University of Chicago economists. (In other words, 1 in 5 workers looking for a job couldn’t find one.)
They need to open every cupboard and look at every possible way to trim their outflows.
Christine Benz
director of personal finance at Morningstar
By comparison, the top fifth of earners (who make more than $1,631 a week) saw only a modest increase, to 3.8%, in that time period.
The withdrawal of retirement savings is a likely indication of this “two-track economy,” whereby the rich have weathered the crisis relatively unscathed while those at the bottom have suffered income loss to a disproportionate extent, said Christine Benz, the director of personal finance at Morningstar.
The latter group is more likely to need to dip into all types of savings to cover basic expenses, she said.
“They need to open every cupboard and look at every possible way to trim their outflows,” Benz said.
To that point, 32% of people pulled at least $100 from savings accounts in August — more than any other month in 2019 or 2020, and double the share from April, according to a recent survey conducted by SaverLife. (89% of respondents had either lost a job or work hours.)
Unavoidable
But consumers may be forced to pull out money at a time when U.S. retirement savings are already meager. The typical worker has $50,000 in retirement savings, according to a Transamerica Center for Retirement Studies survey published in May.
Millennial workers were most likely to withdraw money (or plan to do so) from a workplace retirement account like a 401(k) versus baby boomers — 33% versus 10%, respectively, Transamerica found.
While pulling from retirement savings is regrettable, especially for workers in their 50s and 60s nearing retirement age, it may be largely unavoidable if other options aren’t available, Brobeck said.
And it’s preferable to other financial moves like racking up credit card debt, for example, he said.
There’s also less of a financial disincentive to pull money from a 401(k) plan or individual retirement account now due to rules enacted under the federal CARES Act relief law.
Savers adversely affected by the coronavirus can withdraw up to $100,000 from these accounts in 2020 without the typical 10% tax penalty. (They’d still have to pay income tax, but it can be spread over three years.)
More than 78,000 individuals with 401(k) savings at Vanguard Group took a coronavirus distribution as of May 31. On average, savers withdrew 60% of their 401(k) plan account. The typical saver withdrew $10,413, according to Vanguard.