More than a third of unemployed or underemployed American workers are raiding their retirement savings to meet expenses in this prolonged economic downturn.
Thirty-five percent of these displaced workers have taken a withdrawal from their retirement savings even though the vast majority (87 percent) is familiar with taxes and penalties that may apply, according to a new study by the non-profit Transamerica Center for Retirement Studies. The title of the study says it all: “The Cracked Nest Egg.”
Nearly 13 million people were unemployed in June, while 8.2 million were working part time either because they could not find fill-time employment or because their hours were cut. There were 2.5 million marginally attached to the labor force, meaning that they wanted and were available for work and had looked for a job in the past year.
Among respondents, the estimated median household savings in retirement accounts was $5,800. Millennials in their 20s and 30s seem to be getting a head start on their retirement savings. This age demographic has $10,000 in retirement savings, compared with $2,300 saved up by those in their 40s and 50s, the study found. Those in their 60s and older have amassed $47,000 in their retirement accounts.
More than two-thirds (68 percent) of the 621 displaced workers surveyed said they are less confident in their ability they will enjoy a financially secure retirement. Only 10 percent said they are “very confident” they will be able to retire comfortably.
Dipping into retirement savings is only one action with potentially devastating ramifications for long-term retirement prospects. Forty-five percent of respondents said they had taken a withdrawal from the 401(k) plan at their most recent employer where they were fully employed. Sixty-three percent of those unemployed have taken this action compared with 34 percent of the underemployed.
More than half (51 percent) have tapped into their savings accounts, while 31 percent have increased credit card usage. Almost one-quarter (24 percent) have turned to family and friends for loans.
A 2011 IRA Rollover study conducted by Millionaire Corner found that 18 percent of retirement plan participants have withdrawn some or all of their plan balance. More than half of these said they needed the money to meet day-to-day expenses, while 16 percent said they were hit with an unexpected large expense.
Not surprisingly, the Transamerica study finds that the underemployed are faring better than the unemployed due to opportunities to earn income, gain access to employer health coverage, and alleviate the need to make withdrawals from retirement savings accounts.
The study recommends that displaced workers take a part-time job while seeking full-time employment, update their job skills and seek additional education and vocational training.