Americans struggling financially due to the coronavirus outbreak will soon be able to make withdrawals from retirement accounts to assist with monetary needs. While this may be tempting (and 100% necessary in some cases), financial experts say it should be your absolute last option. Here’s why you should think twice about using your retirement savings right now…
What the Experts Are Saying
First, as part of the CAREs Act, individuals with 401(k) and IRA plans are able to withdraw up to $100,000 penalty-free to cover financial needs during the pandemic. However, experts are saying that you will probably regret using your retirement savings right now.
Although taking out money from your retirement account may help cover short-term expenses, but it may have a long-term impact on your financial outlook. Olivia S. Mitchell, a professor at the University of Pennsylvania stated, “People taking early benefits will end up with a lifetime of lower payouts, and if they already ate into their 401(k)s, they’ll be more likely to face shortfalls in their later years.” It can truly put a permanent dent on your retirement savings efforts.
Many People Don’t Have Much Saved
When it comes to retirement, there are many Americans that do not have $100,000 saved. In fact, Americans ages 56 to 61 had a median balance of $21,000 in their retirement accounts in 2016. Individuals between the ages of 32 and 37 only had about $1,000 saved up.
If you’re one of those individuals with a lower amount in your retirement account, don’t use that as an excuse to take it out. Actually, a retirement account holding $5,000 could reach more than $57,000 in 35 years with a 7% annual return rate. Not to mention, with the market being down right now, your money may expand in a big way when the economy picks back up (and it will).
When Using Your Retirement Savings is a Good Idea
That’s not to say that using your retirement savings isn’t a necessity. For some people, it may be. If you aren’t able to keep up with basic needs, withdraw from your retirement if you need to. Before you do, consider tapping into these sources first…
- Cash in on any stimulus cash you receive. Many Americans will be receiving $1,200 stimulus checks as a part of the CARES Act. Use that money wisely by paying bills with it and getting stocked up with things you need.
- Use your emergency fund. We are in a global crisis. If now isn’t an emergency, what is?
- Homeowners can look into a home equity line of credit. Because the housing market has fallen recently, interest rates on these loans will be low.
- Consider taking a 401(k) loan. Individuals with 401(k) plans should consider taking a 401(k) loan instead of withdrawing the money outright. This way, eventually the money makes it back into your retirement account (over the span of five years).
There is no doubt that these a crazy times we are living in but it is important for everyone to remember, “This, too, shall pass.” Don’t let your financial future suffer because of the short-term financial decisions you make today.
Readers, have you been considering using your retirement savings during this time?
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