About a month after the pandemic started, Tyler Mathiesen lost his position at a technology company, his first full-time job outside of college. Everything was fine for a few months: payments on his $ 75,000 student loan were suspended, and the additional $ 600 weekly unemployment benefit helped pay the rest. He even managed to save some money.
But when the summer ended, the benefit expired and his regular state unemployment benefit almost ran out. He needed a plan, and he needed it quickly.
His solution: Drain all of the $ 8,200 he had in his 401 (k).
“I needed money to pay rent and food,” said Mathiesen, 24, who lives with his girlfriend in St. Paul, Minnesota. With no clear indication that further relief was on the way, he said, “I figured this was my only realistic way to get the money I needed.”
More than 2.1 million Americans have withdrawn money since the pandemic hit the economy in March Retirement plans with the top five 401 (k) plan administrators – Fidelity, Empower Retirement, Vanguard, Alight Solutions, and Principal. These workers, especially in heavily impacted industries such as transportation, manufacturing and healthcare, have been helped by more flexible withdrawal rules created by the Coronavirus Control Act known as the CARES Act.
Even if millions of unemployed and economic recovery are shaky at best, that’s only about 5 percent of the eligible 401 (k) and 403 (b) customers in all of these companies. But that’s still higher than a more typical year when, in general, many participants can still withdraw money for trouble, albeit under stricter rules.
The various federal aid programs – including stimulus payments, more generous unemployment benefits, and suspension of federal student loan payments – have helped contain the damage, according to pension experts. However, some of these programs have expired or may be soon.
“When these expire, there may be an increase in withdrawals for households that are financially affected,” said David Fairburn, associate partner at Aon, a professional services company that provides retirement advice. “For example, an active employee’s spouse may have had a job loss so retiring would be helpful to make up for lost household income.”
Normally, withdrawing money from a deferred tax account before the age of 59 would trigger a 10 percent penalty on top of income taxes. Under the temporary rules of the CARES Act, individuals with pandemic-related financial problems can withdraw up to $ 100,000 from any combination of their deferred tax plans, including 401 (k), 403 (b), 457 (b), and traditionally individual retirement accounts – none Punishment. The rules only apply to plans if your employer so chooses, and they expire on December 30th.
Some plans already allowed hardship withdrawals under certain conditions, and the rules for these were relaxed somewhat in 2019. However, the rules of the CARES Act are even milder: virus-related hardship withdrawals will still be treated as taxable income, but liability will automatically be split over three years unless the account holder chooses otherwise. And the tax can be avoided if the money is transferred to a tax-deferred account within three years.
At Fidelity, the largest provider of retirement plans, around 1.4 million participants had taken coronavirus-related withdrawals as of November 21, representing about 5.6 percent of eligible work plan participants. About 2.2 percent of participants per year have taken off traditional hardship cases in recent years, Fidelity said.
The average total withdrawal that year was about $ 20,000, often spread over two or three transactions. That’s more than three times the typical hardship case – less than $ 6,000 in a 12 month period – in recent years.
“People take exactly what they need and try to minimize the impact on their overall savings,” said Jeanne Thompson, Fidelity senior vice president of workplace counseling. “There is a realization that 401 (k) s are going to be their main source of income and people don’t want to raid it unless they have to.”
Dec. 17, 2020, 7:34 am ET
Other large 401 (k) providers in the workplace showed similar behavior. Vanguard – with a total of five million plan participants – said 5.3 percent of those with a coronavirus-related withdrawal option would have taken one by Nov. 30, averaging $ 23,900. An average of around 3.2 percent of eligible participants have withdrawn a traditional hardship case over the past five years, with an average withdrawal of $ 7,351.
At Principal, approximately 5.7 percent of the 2.6 million attendees with an available coronavirus-related distribution option have availed one through November 30, with an average payout of $ 16,500. Most of them had balances of less than $ 25,000, and workers in manufacturing, healthcare, and professional / scientific industries made the most inquiries, the company said.
(Individual retirement accounts are also available, but experts say detailed payout data is only available after these people file tax returns.)
There’s a good reason a lot of people haven’t made withdrawals: those in need of cash most urgently right now don’t have the luxury of an account to hijack.
According to the Center for Retirement Research at Boston College, only about half of households have balances within 401 (k) plans or individual retirement accounts. And poorly paid workers with no retirement plans have suffered a disproportionate share of the job losses caused by pandemics, experts said.
The dynamic has made it even clearer how few households have emergency savings accounts – and has prompted more employers to start their own programs. Currently, according to Aon, about 10 percent of large employers offer some sort of assistance to encourage saving on rainy days, whether it’s a way to put money aside on a retirement plan or just in education.
However, the magnitude of the damage caused by the pandemic means that even traditional emergency savings advice – aside from about three to six months of basic living costs – isn’t necessarily enough to create a cushion. Someone who lost a job in March could easily have blown those savings.
Even if pandemic-related withdrawals come with fewer penalties, they are still a blow to a person’s retirement savings. How aggressively you have to save to make up the difference depends on your time horizon, your earnings, and the amount you have pulled out.
Imagine a 43-year-old who made $ 62,000 and withdrew about $ 10,400 – the typical participant who, according to analysis by Vanguard, had made a withdrawal by May. 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 this situation would have to increase their savings rates by one percentage point per year.
But those who have had to withdraw may not be able to raise their savings for some time. The longer they have to wait to start saving again, the more aggressive they have to be.
Younger people like Mr. Mathiesen have more time to improve. Even so, he’s worried about how long it will be before he gets back to work, preferably in his field of study – audio engineering and sound design.
Although he had some pointers, Mr Mathiesen is trying to find a job where he can work from home for an indefinite period. He said his partner had a rare autoimmune disease that would put her at greater risk if she contracted the coronavirus.
And other uncertainties abound: Mr. Mathiesen doesn’t know whether the Washington negotiations will result in more lucrative or extended unemployment benefits, and his student loan bills will have to be paid again from February if the moratorium on these payments is not extended.
“I’m young enough to reset and that wouldn’t take me too far,” he said. “But I don’t even know when I can make progress again.”