Employees use retirement savings as a last resort

About a month after the pandemic, Tyler Mathiesen lost his job at a technology company, his first full-time job after college. For months, everything was fine: Payments for his $ 75,000 in student loans were interrupted, and the additional $ 600 federal unemployment benefit weekly helped pay the rest. He even managed to save some money.

But when the summer ended, the extra benefits ended and his regular unemployment benefits were running low. He needed a plan, and quickly.

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

“I needed money to pay for the rent and food,” said Mr. Mathiesen, 24, who lives with his girlfriend in St. Paul, Minnesota. With no clear indication that further relief was to come, he thought, “This was my only realistic way of getting the money I needed.”

Since the pandemic began rippling through the economy in March, more than 2.1 million Americans have raised money retirement plans with the five largest 401 (k) plan managers: Fidelity, Empower Retirement, Vanguard, Alight Solutions, and Principal. These workers, especially those in hard-hit industries such as transportation, manufacturing, and healthcare, have been helped by more flexible retraction rules set by the coronavirus control legislation known as the CARES Act.

Even with millions of people unemployed and the economy recovering shaky at best, that’s only about 5 percent of all those companies’ eligible 401 (k) and 403 (b) customers. But that’s still higher than in a more typical year, when many participants can generally still withdraw money for hardship, albeit under stricter rules.

The various federal aid programs that have been put in place – including stimulus payments, more generous unemployment benefits and the suspension of federal student loan payments – have helped curb the damage, pension experts said. But some of those programs are already on, or could be soon.

“As these begin to expire, there could be an increase in withdrawals for financially affected households,” said David Fairburn, associate partner at Aon, a professional services provider who provides retirement advice. “For example, perhaps the spouse of an active worker has lost a job, so a withdrawal would be helpful in making up for lost family income.”

Typically, withdrawing money from a deferred tax account before the age of 59½ would set off a 10 percent penalty on top of the income tax. But under the temporary rules that make up the CARES Act, people with pandemic-related financial problems 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 chooses to, and they expire on December 30.

Some plans already allowed withdrawals under certain conditions, and the rules for this were relaxed a bit in 2019. But the CARES Act rules are even more lenient: Withdrawals from virus-related hardship are still treated as taxable income, but liability is automatically split beyond three years unless the account holder chooses otherwise. And the tax can be avoided if the money is returned to a tax-deferred account within three years.

At Fidelity, the largest retirement plan provider, approximately 1.4 million participants have made coronavirus-related admissions through November 21, or about 5.6 percent of eligible workplace plan participants. About 2.2 percent of the participants per year took up traditional hardship in recent years, Fidelity said.

The average total withdrawal this year was about $ 20,000, often spread over two or three transactions. That’s more than three times the typical hardship withdrawal – less than $ 6,000 in 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 for workplace consulting at Fidelity. “There is a recognition that 401 (k) s will be their primary source of income, and people don’t want to raid it unless they have to.”

Other major 401 (k) workplace providers witnessed similar behavior. Vanguard – with a total of five million participants on the plan – said 5.3 percent of those with a coronavirus-related withdrawal option have taken one through Nov. 30, with an average amount of $ 23,900. On average, about 3.2 percent of eligible participants took a traditional hardship recording over the past five years, with an average intake of $ 7,351.

At Principal, about 5.7 percent of the 2.6 million participants with a coronavirus-related distribution option have taken one through November 30, with an average intake of $ 16,500. Most of them had balances of less than $ 25,000, and workers in the manufacturing, health care, and professional / science industries made the highest number of requests, the company said.

(Individual retirement accounts can also be tapped, but experts said detailed withdrawal data won’t be available until those people file tax returns.)

There’s a good reason why many people haven’t made withdrawals: those who need the most money right now don’t have the luxury of an account to raid.

According to Boston College’s Center for Retirement Research, only about half of households have balances within 401 (k) plans or individual retirement accounts. And lower-paid workers without a retirement plan have suffered a disproportionate share of the pandemic-related job losses, experts said.

The dynamism has made it even more apparent how few households have emergency savings accounts – and it has prompted more employers to start their own programs. For now, about 10 percent of major employers offer some form of support to encourage savings on rainy days, whether it’s a way to put money aside in a retirement plan or just education.

But the magnitude of the damage done by the pandemic means that even the traditional emergency advice for savings – setting aside about three to six months of basic living expenses – wasn’t necessarily enough to provide a pillow. Someone who lost a job in March could easily have burned that amount of savings.

While pandemic-related withdrawals come with fewer fines, they are still a blow to anyone’s retirement savings. How aggressively they have to save to make up for the difference depends on their time horizon, earnings, and how much they have committed.

Consider a 43-year-old who made $ 62,000 and withdrawn about $ 10,400 – the typical participant who had a withdrawal through May, according to an analysis by Vanguard. That missing $ 10,000 would have grown to about $ 25,000 over the next 24 years, assuming a 4 percent return on investment after inflation. To close the deficit, people in that situation would have to increase their savings rate by one percentage point per year.

But those who have had to withdraw may not be in a position to collect their savings for some time, and the longer they have to wait to start saving again, the more aggressive they have to be.

Younger people, such as Mr Mathiesen, have more time to catch up. Still, he is concerned about how long it will take him to return to work, preferably in his field – audio engineering and sound design.

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

And there’s even more uncertainty: Mr. Mathiesen doesn’t know if negotiations in Washington will bring more lucrative or extended unemployment benefits, and his student loan bills will have to be repaid from February if the moratorium on those payments is not extended further.

“I’m young enough to reset and that wouldn’t leave me too far,” he said. “But I don’t even know when I can make progress again.”