The coronavirus pandemic and recession have, thus far, cost millions of Americans their jobs and reduced incomes for millions more. A majority of workers, 58%, have experienced some kind of disruption to their work status: That means they've been laid off, furloughed, had their hours or pay cut, or been forced into an early retirement, according to a new study from the Transamerica Center for Retirement Studies.
As a result, 23% of workers who are employed or recently unemployed have less confidence in their ability to retire comfortably than they did before the pandemic.
"The pandemic's economic fallout should not be underestimated," says Catherine Collinson, president and CEO of the Transamerica Center for Retirement Studies. "For some workers, the current recession may be a major setback and for others it could be a knockout blow."
Whether your job has been affected or if you're simply concerned about your future finances, here's what you can do to protect your future.
Transamerica's survey found that 33% of millennial workers have taken funds from their retirement accounts or plan to, compared to 15% of Gen Xers and 10% of Baby Boomers. Those numbers bear a more than striking resemblance to the findings of FINRA's 2018 National Financial Capability Study, which also found a similar generational divide.
Financial experts recommend dipping into retirement savings only as a measure of last resort, and that still holds true. Withdrawals frequently come with a 10% tax penalty, and if you take a loan from an account, you effectively have to pay yourself back, with interest, depriving your future self of the benefits of compound growth.
Many plans include an exception to the 10% rule for hardship-related withdrawals for expenses like medical bills and emergency rent or mortgage payments. The CARES Act temporarily waives that rule for "coronavirus-related distribution" for withdrawals up to $100,000.
Some 401(k) providers are also offering more favorable rates than usual on retirement loans right now, according to Gerri Walsh, president of FINRA's Investor Education Foundation. So "talk to your 401(k) provider," she says. "Your employer should be able to point you to that information and find out the origination fee on the loan and then the interest rate that they would charge, and then compare it using any of the many calculators that are available online with consumer lending terms."
That doesn't mean that a withdrawal or loan is necessarily a good option, since you're still removing money from your account and costing yourself gains from compound interest in the long run.
"Our big message from what's borne out of the research is to encourage people, do your homework, explore all opportunities, explore all alternatives, before making the decision to dip into retirement savings," she says.
The most effective plan, if you can do so while still covering your day-to-day expenses, is to maintain your usual investment strategy, according to Walsh. Withdrawing funds too early locks in losses and halting contributions robs you of future interest.
"Markets go up and markets go down. Markets have been particularly volatile during 2020, so far," she says. "The best thing that you can do is contribute to your retirement accounts if you're able to, and especially if you get a company match, because that can enhance your savings in a huge way."
Video by Ian Wolsten
Whatever plan you do follow, Walsh urges you to shop around and make sure you're borrowing or withdrawing in a way that will have the least destructive impact on your future finances. That includes contributing to your 401(k) if you still can, and "being very mindful about the impacts" of anything else.
"If your choice is getting the expense that's unavoidable on a credit card versus taking money out of your 401(k), I can't tell you what to do other than [consider] which is ultimately going to be more expensive for you," she says.
"Our research has found over the years that most people do not have adequate emergency savings," says Collinson. "In the absence of emergency savings to get us through these types of financial shocks, we have a limited number of options."
The survey found that the median worker only has $5,000 saved for an emergency, and the typical millennial only has $3,000 set aside.
While it might be difficult to pad or start a rainy day fund if you're already out of a job or have reduced hours, it does underscore the importance of planning during the times when you do have some income to set aside. If you're worried that your job or income may be in danger right now, start planning as soon as possible.
"High-interest rate credit card debt is an extremely difficult hole to dig oneself out of," she says. "The bank of family and friends may offer some support, but sometimes those have terms and conditions that are even more onerous than financial institutions."
The 2019 Transamerica survey found that only 24% of workers had a written retirement strategy. If you make a budget and plan out goals, though, Collinson says, that can help you take better care of yourself in the short term and in the future.
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