Most Americans Haven’t Tapped into Their Retirement Savings – Yet
From March through May, Americans endured business closures, furloughs and layoffs as our country sought to prevent the coronavirus from overwhelming the healthcare system. Congress anticipated the economic distress this would create and passed the CARES Act. The new law offered forgivable business loans, increased unemployment benefits and changed retirement savings accessibility rules.
While demand for business loans and unemployment benefits increased sharply, surveys suggested that few Americans had taken distributions from their retirement savings through April. Instead, U.S. government data shows that many people reduced spending, and some even managed to save more than usual. That was good news for anyone concerned about retirement security in the United States.
By late April, however, Americans’ retirement confidence had begun to erode as a result of the pandemic, according to a report from nonprofit Transamerica Center for Retirement Studies (TCRS Survey). Twenty-three percent of survey respondents, overall, indicated their confidence in the ability to retire comfortably had declined, although the change was more pronounced among Baby Boomers (32%) than Millennials (20%) or Gen X (25%).
When asked how they have or would make ends meet if events related to the COVID-19 pandemic negatively affected their finances:
- 56% said savings,
- 29% said credit cards,
- 26% said unemployment benefits,
- 24% said CARES Act stimulus checks,
- 16% said a spouse or significant other’s income,
- 14% said retirement account distributions, and
- 10% said a loan from a friend or family member.
Almost one-in-four respondents (22%) in the TCRS Survey had already tapped into their retirement savings (and/or planned to), and Millennials (33%) were far more likely to have done so than older generations.
Plan sponsors have remained steady in the face of coronavirus upheaval. A mid-April Callan survey found that relatively few plan sponsors had suspended (3%) or reduced (5%) defined contribution (DC) plan matching contributions, overall. However, there was significant variation in the responses of plans sponsored by companies that experienced layoffs, furloughs or salary reductions.
Among those that had experienced employee layoffs:
- 40% reduced DC plan matching contributions, and
- 20% suspended their employer match.
In late May, Callan reported, “These numbers may vary in the coming months depending on the scope and duration of the crisis.”
As states reopened in June, the number of new COVID-19 cases began to rise, creating concern about the sustainability of economic recovery. While many economic indicators continued move in the right direction, some have deteriorated.
Notably, in July, Bloomberg’s Consumer Comfort Index retreated for the first time since late May. For the economy to recover, consumers must feel comfortable shopping and spending. After all, consumer spending is responsible for almost 68% of U.S. economic growth during the first quarter of 2020. The new proposed stimulus package may also affect these different factors.
If economic recovery falters, it’s possible that more businesses will reduce costs through employee layoffs and retirement plan match reductions. If the coronavirus-fueled recession deepens, financial challenges may cause more Americans to dip into retirement savings. We won’t know whether the behavior of plan sponsors and participants is changing until more data becomes available.
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The material in this blog is presented for general informational purposes only. The information presented is not investment, legal, tax or compliance advice. Millennium Trust Company performs the duties of a directed custodian, and as such does not offer or sell investments or provide investment, legal or tax advice.