Three Things To Consider Before Tapping Your Retirement Savings During The Coronavirus Crisis

The Coronavirus Aid, Relief, and Economic Security (CARES) Act temporarily loosened the restrictions and costs associated with taking distributions from your IRA and 401(k) accounts. These new options are available through December 20, 2020:

• No penalty withdrawals: Take early withdrawals from your retirement account without paying the 10% early withdrawal penalty.
• Tax withholding change: Instead of an immediate 20% federal tax withholding, the federal tax payment can be spread over three years.
• Borrowing limits increased: The CARES Act increased the borrowing limit from 50% to 100% of your 401(k) account balance (up to $100,000), and you have an extra year to repay the loan.

Many people are experiencing a lot of financial stress, and it can be very tempting to use retirement money as a financial backstop. However, those people nearing retirement age should carefully consider the long-term consequences.

#1 – The Stock Market is Riding a Rollercoaster

Investor and financial commentator, Jim Rogers, famously offered this investment advice:

“Buy low and sell high. It’s pretty simple. The problem is knowing what’s low and what’s high.”

This chart for the first quarter of 2020 highlights how hard that is to do in a volatile market.

In general, retirement planners encourage people to avoid tapping retirement savings if possible.  Each time you remove money – even if you pay it back later – you risk losing overall value. Particularly, if you’re forced to withdraw money during a severe downturn. You run the risk of “selling low and buying high,” which is the opposite of what you want.

Only use retirement savings if you have no other options. Withdraw the absolute minimum and repay yourself as quickly as possible. 

#2 – You May Be Retiring Sooner Than Expected

According to a survey reported by MarketWatch, the COVID-19 crisis is responsible for a wave of voluntary early retirements.  Compared to younger workers, people over 50 often have a harder time finding another job at a comparable salary – or any job at all. Even before the current crisis, 43% of workers retired earlier than they planned.

Early retirement can upend your retirement financial plan. Workers who begin taking Social Security benefits at age 62 will receive about 30% less in monthly benefits than if they waited until age 67. You may have to scale back your retirement lifestyle or withdraw more from your retirement savings, earlier than expected.

Pulling a large amount out of retirement savings to cover current expenses now, could have a serious impact on your long-term financial planning.

#3 – Your Employer May Not Allow It

The CARES Act allows plan providers to relax the rules regarding distributions and loans, but that doesn’t mean that all plan to do so.  In April, the Plan Sponsor Council of America (PSCA) released a survey of plan sponsors:

• 1% were “still deciding” which provisions they will implement.
• 4% of all plans decided increase distribution amounts from 50% to 100% (up to $100k), with two-thirds of larger plans doing so compared to 27% of smaller plans.
• 7% will allow the longer repayment period, with larger firms more likely to do so.

The biggest discrepancy between larger and smaller plans was acceptance of loan limit changes. Roughly, half of larger plan sponsors will allow that change compared to less than 20% of smaller plans.

Overall, 9.2% of plan sponsors aren’t planning to adopt any of the changes allowed under the CARES Act.  Be sure to check with your plan sponsor before making an early distribution or loan part of your short-term financial plan.

Learn more about retirement and financial planning in these previous Bay Alarm Medical articles:

• Three important questions to ask before you retire
• How a retirement planner can help secure your retirement finances
• Five financial resolutions for seniors
• Why your credit score matters in retirement

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