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Published: Feb 23, 2021 5 min read
Woman counting money from her broken piggy bank
Money; Getty Images

Nearly a third of of non-retired Americans plan to tap their retirement savings this year to buy necessities or pay down debt, according to a new survey from Money and Morning Consult.

The survey of 2,200 adults conducted last month found that 35% of non-retired respondents had already dipped into their retirement funds since the pandemic began. The fact that 30% expect to do so again for basic needs reflects the widespread financial hardship inflicted by the coronavirus. Unsurprisingly, a majority of respondents also say they need another stimulus check to make ends meet.

Financial advisors generally frown on raiding your retirement savings for current needs. As health care costs continue to rise and people are living longer, you'll need a healthy nest egg to support you once you've stopped working. But if you're struggling financially and have few other options, that money could be a lifeline.

“If an individual is forced to tap into retirement savings as a stop-gap it's not the end of the world,” says Gerry Barrasso, the president of United Financial Planning Group based in Hauppauge, N.Y.

If you have to do it, focus on minimizing the amount you take out as much as possible, he adds. Look at your yearly budget, determine how much you really need to take out for the first three months and start with that — you definitely don’t want to withdraw more than you’ll need.

Figuring out how much this move will affect your target retirement plan comes down to how far out you are from retirement, your ability to find employment in the future and either eventual repayment or restarting your savings plan, Barrasso adds. If you’re in your 20s or 30s, it may not have too much of an impact, but as you move into your 40s and beyond, you will likely need to reassess your original plan once you’re back on your feet. If you can, borrow from your 401(k) instead of making a withdrawal. You’ll have to pay the loan back over time.

And don't forget taxes and penalties if you withdraw money from your tax-deferred 401(k) or IRA. With 401(k)s, employers can allow plan participants to make hardship distributions for "immediate and heavy financial needs." But those who make early withdrawals still need to pay income tax, and will usually be subject to a 10% additional tax penalty, with some exceptions. The CARES Act allowed savers to make penalty-free withdrawals up to $100,000 and spread out the taxes owed on the retirement plan over three years. While that provision expired at the end of 2020, the stimulus package signed late last year allows savers to continue making those penalty-free withdrawals, as long as they live somewhere a major disaster has been declared (areas only affected by the COVID-19 disaster don’t count).

Keep in mind that even without the penalty, taking money out of your retirement savings account means missing out on potential returns. Missing the market’s top 10 best days over the last 20 years could cut your overall return in half, according to J.P. Morgan Asset Management’s 2020 guide to retirement.

Remember: tapping your retirement accounts should be a last resort. Before you do so, use any emergency savings you have and file for unemployment benefits if you’ve lost your job. There are also resources that could help you find free or discounted food and services, like Aunt Bertha, 211 and Hunger Free America. You may also want to consider taking out debt, including using credit cards and home equity lines of credit, Chad Parks, founder and CEO of Ubiquity Retirement + Savings, previously told Money. It may seem aggressive, but if you need to consider filing for bankruptcy, most debt would be negotiated or written off while 401(k) assets would be protected, he adds.

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The New Investor's Survival Guide: How to Make Money (and Stay Sane!) in Today's Wild Markets

Millennials Need to Save Extra if They Want to Retire Like Their Parents and Grandparents

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