37% of Americans Are Making This Risky Retirement Move
Planning for retirement in the age of COVID-19 can seem impossible at times. The stock market crash earlier this year may have had an impact on your retirement savings, and if you lose your job, that can affect how much you're able to save.
Some Americans, however, are making what could be a dangerous mistake when it comes to their retirement savings. It may seem innocent enough, but it could potentially cost you thousands of dollars in the long run.
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The move that could put your retirement at risk
Times are tough for millions of people, and the unemployment rate hovered around 11% in June, according to the U.S. Bureau of Labor Statistics. That's down from April's jobless rate of over 14%, but it's still far higher than it was back in February, when it was at just under 4%.
If you're out of work and struggling to make ends meet, you may be tempted to pull cash from anywhere you can find it. In fact, nearly half of Americans have cut their excess spending and strengthened their emergency funds in response to the coronavirus pandemic, according to a recent survey from nonprofit organization Life Happens.
However, 37% of survey respondents also said they've dipped into their retirement accounts as a result of COVID-19. Although the Coronavirus Aid, Relief, and Economic Security (CARES) Act has made it easier to tap your retirement savings by waiving the early-withdrawal penalty and giving Americans extra time to pay their income taxes, withdrawing your savings early is still a risky move.
The risks of tapping your savings too soon
One of the biggest risks you take when you withdraw your savings before retirement is that you're stunting your investments' growth potential.
Your investments rely on compound interest to help them grow. Compound interest is essentially interest you earn on your interest, so the longer your investments have to compound, the faster they'll grow. By dipping into your savings, you're limiting your potential investment earnings.
For example, say you're 40 years old and have $50,000 in your retirement fund. For simplicity's sake, let's say your investments are earning an annual 7% rate of return for the next 25 years. If you don't do anything else, you'll have around $271,372 saved by age 65.
However, let's say that right now you decide to withdraw just $1,000 from your retirement fund to help cover your bills. That may seem like a harmless amount, but after 25 years, you'll only have around $266,000 saved. In other words, that $1,000 withdrawal actually cost you more than $5,300 in potential earnings. If you make repeated or more significant withdrawals from your retirement account, you could miss out on tens of thousands of dollars in potential investment gains.
Making ends meet without touching your retirement account
If you've lost your source of income and desperately need cash, you may feel that withdrawing your retirement savings is your only choice. While in some cases that might be true, it's important to ensure you've exhausted your other options before you tap your retirement fund.
You've likely already squeezed every penny out of your emergency fund if you're considering tapping your retirement account, but if not, that's the first place to look for extra cash. Next, rework your budget and consider cutting some of your expenses, and reallocate those savings to your emergency fund. Every dollar counts here, so even small adjustments in your budget can help.
If that's still not cutting it, reach out to your creditors to ask for payment assistance. Many banks, credit card issuers, and lenders are being more lenient right now and can offer help on a case-by-case basis, so you may be able to delay or temporarily reduce your payments. You never know what's available until you ask, so it never hurts to reach out.
Depending on how tough your situation is right now, all of that might still not be enough to pay the bills. If you do choose to take money from your retirement fund, withdraw only the bare minimum you need to get by. Once you get back on your feet financially, you may need to boost the amount you're saving to keep your retirement plans on track. By only taking a small amount from your retirement fund, you'll make it easier to catch up later.
Saving for retirement is challenging enough as it is, but COVID-19 has made it a lot tougher for many people. It can be tempting to tap your retirement savings when money is tight, but if you take advantage of all your other options first, it will be easier to reach your retirement goals.
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