Many U.S. consumers experiencing money challenges during the coronavirus pandemic are taking actions that may hurt their long-term financial stability.
In fact, 50% of workers said they took actions in August that could negatively affect their future financial security, according to a survey from financial advisory firm Edelman Financial Engines.
Though some likely felt they had no choice, many may end up having regrets.
Consumers putting retirement savings at risk
Of those who took actions deemed financially harmful, 45% made a move that affected their retirement account, such as borrowing from their plan or cutting back on their contributions. On top of that:
- 21% depleted their emergency savings
- 16% went into forbearance
- 14% incurred more debt
As part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, some provisions made it easier for workers to withdraw money from retirement plans or extend loan repayment periods.
The survey found that 16% of respondents were considering taking a loan or a hardship withdrawal from their retirement accounts. Of those respondents, 1 in 2 said they were considering the move because of the pandemic.
Earlier surveys suggest consumers are well aware that their actions today may have long-term consequences. For example, one survey found that many workers were considering delaying their retirement date because of financial setbacks they have had during the pandemic.
Some consumers raid retirement accounts multiple times
Nearly 3 in 10 workers (28%) have withdrawn money from their retirement plans at some point in their lives. In fact, 16% of all workers have done so once, and 12% have done so multiple times.
More than half of respondents (55%) who have taken out money early from their retirement accounts have come to regret it. On top of that, 42% of respondents who took out a 401(k) loan and 41% who made a hardship withdrawal said they didn’t understand the implications (taxes, penalties, etc.) of their actions.
Some may even have made a different decision if they had done some research into why it’s a good idea to be cautious about withdrawing money early from a retirement plan.
More than half (52%) of those who took out hardship withdrawals and 44% of those who borrowed from their retirement plans said they could have gotten the money they needed some other way, such as through a personal loan or by adjusting their spending.
Consumers’ reasons for taking out money from their retirement accounts ranged from paying for necessities to splurging on recreation. When asked why they took out money:
- 35% said to pay for housing-related costs
- 20% said to pay down credit card debt
- 8% said to make a car purchase
- 7% said because of a loss of income
- 6% said to pay for other costs, such as vacations or weddings
Methodology: Edelman Financial Services surveyed 1,902 retirement plan participants between Aug. 20 and Sept. 2, 2020.