Many Americans Rely on Retirement Savings to Cover Basic Needs

Building a healthy retirement nest egg is a lifelong process, and the longer contributions are allowed to accrue, the greater a person’s potential to meet their targeted goals. Unlike a traditional savings account, those geared specifically toward retirement – such as employer-sponsored 401(k)s – are designed to prevent account holders from being able to access their funds until their post-working year.

This allows workers to ensure they are maximizing their nest egg savings and not taking out money for unnecessary spending. However, a new study shows that a large percentage of workers are making early withdrawals – and incurring penalties and fines for doing so – to meet needs that are not related to retirement.

New research from HelloWallet found that 26 percent of individuals participating in an employer-sponsored 401(k) plan will make an early withdrawal at least once before they enter retirement. The data shows that workers now withdraw or breach over $70 billion annually out of their 401(k)s for non-retirement needs, and penalized withdrawals increased from $36 billion to about $60 billion between 2004 and 2010. The long-term implications of these trends can be harmful to consumers who have not amassed enough money to last them through the duration of their golden years.

“While there is no question about the need for retirement savings, the issue raised by our research is whether employees are given the financial tools, including unbiased guidance, to make the best decisions every step of the way,” said HelloWallet founder and CEO Matt Fellowes. “These data strongly indicate that, for many workers, investment advice is misaligned with their investment needs and, as importantly, with their basic day-to-day financial needs.”

Early withdrawals should be a final resort

When a person is facing a medical emergency, job loss or other sudden expense, tapping into a nest egg may seem like the only option, but this is not always the case. Individuals may first benefit from speaking with a credit counselor or financial adviser to explore other means before jeopardizing their retirement. Negotiating bills, cashing in a certificate of deposit, refinancing or cutting back heavily on spending are other options that may be preferable. Taking out a low-interest loan may also be more affordable than the penalties and taxes that will be imposed during an early retirement withdrawal. Regardless of a person’s final decision, exploring all other options before draining retirement savings is advised.