Economy

Millions of Americans Are Wiping Out Their Retirement in the COVID-19 Recession

When times get hard for the average American family and workers, anything of value may become a source of funds. This means that many bad decisions are made about where to get capital to get through a recession or a life-changing event. In the COVID-19-induced instant recession of 2020, the big mistake the public is making is tapping into their retirement accounts.

While the CARES Act makes allowances for tapping into retirement accounts with certain penalties, prematurely accessing your retirement accounts like a 401(k) or an IRA can wipe out your golden years, even if there is no tax penalty.

According to a fresh study from Bankrate.com, 31 million Americans who are working or were recently unemployed with retirement savings either have tapped into or plan to tap into their retirement accounts. That is 31 million people, and the tally was 14% that had already tapped into retirement accounts and another 13% who were planning to access those funds.

Most people know this is a very bad decision. The hard reality is that this may be the last form of non-debt capital that is available. While it is well known that accessing retirement funds is costly in the long term, many Americans are either not eligible for stimulus money or they cannot access unemployment benefits (e.g., self-employed) or unemployment benefits do not help them that much in their monthly bills.

The coronavirus pandemic has caused many sudden and abrupt changes in the economy. Many of the recently unemployed workers also will have little hope of returning to work because the companies they worked for either are out of business or are on the way to being so. Many other businesses simply will never operate with as many employees as they did in 2019.

Sadly, Bankrate’s data showed that those who have become unemployed since January 1, 2020, and who also have retirement savings, roughly half of them have already withdrawn or plan to withdraw from their retirement funds.

Another issue, which is of course understandable, is that many workers have now stopped or lowered their own contributions into their retirement accounts. The main reasons cited are loss of income, building up cash, additional expenses, helping other family members and additional debt. Their report even said:

Overall, 18% of working or recently unemployed U.S. adults are contributing less to their retirement accounts now than prior to the pandemic, and 49% are contributing the same. A mere 8% are contributing more. Troublingly, one-quarter were not contributing to retirement savings either before the pandemic or now.

There is also a big difference in age brackets, generational behavior and income groups among those who are using their retirement accounts as a source of funds during the COVID-19 pandemic.

The report showed that rough one in five millennials who have retirement savings already has used some of that as a source of income. Only 8% of those 40 to 55 (Gen-X) have tapped retirement accounts, as have 10% of the baby boomers, who are age 56 to 74.

As for income brackets, it should be no surprise that lower incomes typically are more likely to use retirement accounts as a source of funds. Some 45% of the lowest income households already have or plan to use their retirement accounts as a source of funds. Households with retirement savings and incomes of $30,000 to $49,999 have a rate of 30%, and households with $50,000 to $79,999 had a 34% rate. Households with income of $80,000 and higher saw only a 17% rate.

While Bankrate has illustrated these figures of using retirement accounts as piggy banks clearly, the life rule violation applies regardless of one’s circumstances and who is ultimately at blame here. Even without a tax penalty for tapping retirement accounts early, most people who plan for retirement make their assumptions for contributions and their future nest egg based on steady returns and sticking with a strategy over time. That generally includes a steady stream of contributions and an estimated 5% to 6% compounded return over time.

Take a guess what happens to retirement plans under an adverse scenario, even without any early withdrawal penalty. It hurts total retirement plans and assumptions when markets dip and funds are not being contributed into the markets at lower prices. It also hurts when most of the retirement funds being tapped were likely much lower than at the peak values.

People who save for retirement have now dealt with two nasty recessions in the past decade that have altered the investing and retirement savings landscape. Sadly, these figures that are being seen are only about 90 days into the COVID-19 recession.

Millions of Americans faced much more than just a year of hardship in the Great Recession a decade ago, and this new instant recession is expected to be shorter but may come with unemployment well above 20% and gross domestic product contracting more than 20% before the recovery. It sure sounds like millions of Americans just saw their retirement timeline and quality of their retirement change for the worse, and this may only be the start of very negative trends around retirement savings accounts.