Emergency savings shortages contribute to poor retirement security: Fidelity

An inability to weather emergency spending needs means more people taking withdrawals from retirement accounts, hampering the ability to save.

October 18, 2023, By Chris Clow.

With many Americans pinched by stubbornly high inflation in the economy, more Americans are turning to early withdrawals from retirement accounts to make ends meet — which could have consequences by the time retirement actually comes.

This is according to a study by Fidelity Investments.

“The percentage of plan participants taking an early withdrawal from a retirement plan has increased over the past five years,” the study found. “While 2020 was a unique year, as participants sought penalty-free distributions allowed under the CARES Act, since then, in-service distributions, plan loans, and hardship withdrawals are all on the rise. In fact, more than three times as many participants took a hardship withdrawal in 2023 than did in 2018.”

The fact that such withdrawals are increasing absent the penalty-free option granted by COVID-19 relief legislation punctuates the pressure felt by U.S. workers in these inflation-fueled times, the report explained.

This reality presents challenging implications for the U.S. retirement system, which was recently ranked at about the middle of the road in a global analysis of international retirement systems.

“Unexpected expenses can derail budgets, short-term financial goals, and even saving for retirement if employees don’t have savings available,” the report stated. “In fact, employees who lack emergency savings are more likely to withdraw money from their retirement accounts (e.g. 401K) to cover expenses, as it may be the only source of savings they have.”

While the report makes mention of challenges people may have with emergency expenses of $1,000, the Consumer Financial Protection Bureau (CFPB) has largely been focused on a much smaller figure: $400. In 2019, the Bureau launched a new initiative called “Start Small, Save Up” designed to better prepare Americans for the endurance of unexpected expenses via an emergency fund, as well as the necessity of saving money for the future.

Bill’s comment, this is where a reverse mortgage credit line would be of help for those unexpected emergencies i.e., air conditioner and heating repairs, medical emergencies, car repairs, roof repairs, plumbing emergencies to name a few.  Give me a call and I will analyze your situation to see if a reverse mortgage is right financial tool for you.

Disclaimer: This material is not from HUD or FHA and has not been approved by HUD or any government agency.?The reverse mortgage borrower must meet all loan obligations, including living in the property as the principal residence and paying property charges, including property taxes, fees, hazard insurance.  The borrower must maintain the home. If the borrower does not meet these loan obligations, then the loan will need to be repaid.? We do not establish an escrow account for disbursements of these payments. A set-aside account can be set up to pay taxes and insurance and may be required in some cases. The loan also becomes due and payable (and the property may be subject to a tax lien, other encumbrance, or foreclosure) when the last borrower, or eligible non-borrowing surviving spouse, dies, sells the home, permanently moves out, defaults on taxes, insurance payments, or maintenance, or does not otherwise comply with the loan terms. Interest is not tax-deductible until the loan is partially or fully repaid.? LeaderOne Financial Corporation is licensed by the Arizona Department of Financial Institutions. Mortgage Banker License # - 0918657.   Corporate Headquarters: 7500 College Blvd Suite 1150; Overland Park, KS 66210, NMLS ID #12007 http://www.nmlsconsumeraccess.org.  Toll Free (800) 270-3416.  This advertisement does not constitute loan approval or a loan commitment. Loan approval and/or loan commitment is subject to final underwriting review and approval.