Did you know that a health crisis, job loss and other major life-changing events affect 96% of people during their working years, according to a recent NEFE report?¹ It’s an unfortunate reality, but it’s true: unemployment, divorce, health problems and income disruptions affect even disciplined savers.
The report – commissioned by the National Endowment for Financial Education (NEFE), called “Untangling the Determinants of Retirement Savings Balances”¹, went on to say that those life-changing events occur at least four times before age 70, which then causes the affected people to dip into retirement plans and have less money in retirement. That leaves 401(k) retirement plan participants – at all income levels – accumulating only a third or so of the amount they actually need to maintain their standard of living in retirement.
The good news is that you have a Money Coach who can help you build emergency savings for such an occasion. Get started with protecting your finances by understanding the potential problems and learning how you might prepare for them.
Effects on Retirement Funds
Even with the taxes and penalties you get when you tap retirement accounts to pay for household income, using your retirement accounts as liquid savings during a severe hardship may be necessary after every other option has been explored. Nevertheless, repeated withdrawals and a lack of savings contributions end with underfunded accounts in retirement. Even if withdrawals are small, the long-term effects are substantial because you may lose the opportunity to earn investment returns on the amount withdrawn.
Two types of income disruptions were examined in the NEFE study: workers losing income for a whole year, and workers whose earnings dropped 10% or more for a whole year.
Among working men, ages 25-70, 61% have lost their earnings for an entire year at least once, and a quarter of those who are 66-70 years old have lost their earnings for an entire year at least four different times.
Costs of Economic Shocks in Dollars
The study put a price tag on the economic shocks. Here are a few examples:
Earnings: An earnings drop of 10% or more in a year led to $2,722 less in retirement savings for ages 55-61, and a $6,218 drop for ages 66-70. Retirement savings decreased as much as $10,000 when a decrease in earnings happened four or more times.
Health: People who experienced poor health lost as much as $86,286 in retirement savings, depending on their income class, age, and the severity of their health deterioration.
Debt: Every $10,000 increase in debt led to a $2,482 decrease in retirement savings, depending on age.
The study has a silver lining. Even though financial setbacks can be difficult to avoid, there are some factors that individuals can control.
One of the most important things that you can do is take advantage of your employer-sponsored plan, if you have one available. First and foremost, start saving, and if available, try saving up to your employer’s match. If you don’t have an employer-sponsored plan, consider contributing to a Roth or Traditional IRA.
Even Better News
While financial setbacks can be scary and stressful, a Money Coach can help you achieve and maintain finances; in turn, you can feel better knowing your finances are more prepared to take on life’s challenges.
Whether you’ve already used retirement savings for a life-changing event and you’re trying to get back on track, or you’re trying to protect retirement savings while meeting current needs, your Money Coach can help. Call 888-724-2326 today.
¹“Untangling the Determinants of Retirement Savings Balances.” National Endowment for Financial Education, n.d., http://www.nefe.org/What-We-Provide/Primary-Research/Untangling-Determinants-of-Retirement-Savings-Balances. Accessed 7 Aug. 2017.
Employer matching contributions may be subject to a vesting schedule that can reduce or eliminate employee access to employer contributions if they leave the employer within a certain timeframe. See your Plan Document or speak with your Plan Administrator to understand your employer matching contributions.
If you withdraw money from a retirement or other tax-advantaged account outside of IRS distribution rules, you may have to pay income tax and an early withdrawal penalty. See your plan document or the appropriate IRS publication for more information.
Understand the potential risks of taking a retirement plan loan. Your net income will be reduced by your loan payment which may impact your ability to meet your other financial obligations. If you leave your employer, you may be required to repay the loan in full, or owe income taxes & a 10% penalty on the outstanding balance. See IRS Retirement Topics – Retirement Loans for more information.
Information provided in this article is for informational purposes only and is not intended to offer specific personalized investment, financial planning, tax, legal, or accounting advice. We recommend that you consult an attorney, tax advisor, or accountant regarding your unique circumstances.
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