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If you're going through a rough financial period, dipping into your retirement savings might seem like an easy way to secure some quick funds. And if you’ve considered accessing your 401(k) or IRA during the pandemic shutdown, you're not alone: a recent Bankrate survey shows that 27% of people have tapped into their retirement plans in recent months.
Looking at those who lost their jobs since the start of the year, the survey reveals that half have already used or plan to use their retirement accounts for financial relief.
According to Bankrate, millennials and individuals with household incomes under $30,000 are the most likely to withdraw funds from their retirement savings. For those with few other options, retirement savings can appear to be a lifeline, as it avoids costly fees or high-interest loans.
However, younger savers are the ones who stand to lose the most by withdrawing from their retirement accounts now, due to the effects of compound interest, according to Bankrate's Chief Financial Analyst Greg McBride.
We've actually discussed this with McBride previously: If you decide to pull funds from your retirement account, it's crucial to start rebuilding your savings as quickly as possible. Failing to do so means missing out on years of exponential growth.
Need a refresher on the power of compounding interest? Check out our video for more details:
If this is enough to persuade you to leave your retirement savings untouched (and I truly hope it is), it’s time to explore other ways to make ends meet.
Talk to your landlord, utility provider, or car loan lender about deferred payments. If you’re eligible, consider using a credit card with a zero-percent interest promotion. You could also apply for public assistance. There’s no one-size-fits-all solution—each approach to securing funds will come with its own set of challenges.
However, if you absolutely must access your retirement funds now, consider taking out a loan instead of a regular withdrawal. While it should remain a last resort, the CARES Act has made it easier to borrow from your 401(k) and has extended the repayment period.
Be sure to establish a payment plan to get back on track when your income stabilizes, allowing you to recover as much of the lost time as possible.
