The coronavirus pandemic created so much financial uncertainty that many Americans took money from their retirement accounts to handle the costs of everyday living.
A majority of consumers (58%) either borrowed or withdrew funds from a 401(k) or individual retirement account (IRA) during the pandemic, according to new research from Kiplinger's Personal Finance magazine and wealth management company Personal Capital.
While many consumers looked to their retirement accounts as a solution for their current economic struggles, many may suffer the financial consequences later in life.
63% use the money they withdrew or borrowed for daily expenses
Nearly two-thirds (63%) of those who withdrew or borrowed money from a retirement account used the money to pay for day-to-day living expenses. More than a third of respondents (41%) used the money for medical expenses. An earlier survey by ValuePenguin found that 61% of Americans have been surprised by an unexpected medical bill.
Consumers also used the funds in other ways. Specifically:
- Home repairs: 32%
- Auto repairs: 26%
- Tuition: 23%
- Assistance to family members: 21%
The Coronavirus Aid, Relief and Economic Security (CARES) Act allowed those impacted by the COVID-19 crisis to withdraw up to $100,000 — until Dec. 31, 2020 — from certain retirement accounts without paying the 10% early withdrawal penalty. The act also allowed Americans to borrow up to $100,000 — until Sept. 22, 2020 — from their accounts.
The newly passed $900 billion COVID-19 relief package allows people to withdraw or borrow up to $100,000 from their 401(k) accounts — penalty-free — if they’re in an area with a major disaster declaration.
Many Americans elected to take out loans or make withdrawals that were on the high side. Nearly a third (32%) said they withdrew $75,000 or more from their retirement account. Of those who took out loans, the majority (58%) borrowed between $50,000 and $100,000.
Retirement account withdrawals, loans may have long-term effects
Saving enough money to live comfortably in retirement can be challenging in even the best economic environments. The financial challenges caused by the pandemic may have made it even more difficult for some. For example, nearly a quarter (24%) of women reported — in a recent survey — being less confident that they would be able to retire comfortably because of the pandemic.
According to the Kiplinger's Personal Finance and Personal Capital survey, 2 in 3 respondents (66%) said they’ve changed their retirement plan because of the pandemic. On top of that, more than a third (35%) said they believe they will have to work longer than they had intended because of the financial setbacks they experienced due to the pandemic.
The financial turmoil experienced in 2020 also gave some consumers a new outlook on how much they may need in retirement. Nearly half of respondents (47%) expect to need a larger nest egg to retire comfortably in light of the struggles of 2020. On the flip side, 11% believe they will need less than they originally thought.
Methodology: Kiplinger's Personal Finance and Personal Capital surveyed 744 adults between the ages of 40 and 74 on Nov. 4-10, 2020. All respondents had a minimum of $50,000 in retirement savings and were not fully retired.