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Covid-19 Pushing Many Americans To Incorporate Their Retirement Accounts, Experts Say

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The coronavirus pandemic has heightened the split in the U.S. economy. Some with hefty retirement accounts dipped into the money and rode out a choppy economy, while those who lived paycheck to paycheck cut back and scraped by as best they could.

“There were two different experiences during the pandemic,” Dan Egan, vice president of Behavioral Finance and Investing at Betterment Financial in New York, told Newsweek.

“Those who had a white-collar job and a healthy nest egg sailed through easily, and many contributed more to their retirement account,” he said. “But if you had a service-industry job, the pandemic knocked you off the ladder.”

Retirement illustrated with figurine sitting on paper currency, studio London, October 2020 (Photo by Peter Dazeley/Getty Images)
Peter Dazeley/Getty Images/Getty

Defined contribution retirement plans, typically funded by automatic withdrawals from an employee’s paycheck, are at the center of private-sector retirement plans in the U.S. Vanguard, a provider of mutual and exchange traded funds, said about 100 million workers participate in such programs, with assets totaling an estimated $8.8 trillion.

The Coronavirus Aid, Relief and Economic Security Act (CARES), signed into law in March, provides penalty relief and greater flexibility in withdrawals from retirement accounts by those hit by the COVID-19 pandemic.

The CARES Act allows those with traditional IRAs and employer-provided 401(k) plans to withdraw as much as $100,000 from a retirement account without a 10% penalty for those under age 59.5 years. In general, one-third of the money withdrawn will be considered as taxable income for the next three years. Money withdrawn can be repaid to the retirement account.

The Investment Company Institute (ICI), a Washington-based trade association for U.S. and international investment companies, reported that withdrawals from defined-contribution retirement plans were slightly higher in the first three quarters of 2020 than in previous years, but remained low,

In the first three quarters of this year, 3.4% of plan participants withdrew money from their account, compared with 3.3% for the same period in 2019. During the economic turmoil in 2009 caused by the collapse of the subprime mortgage market, such withdrawals equaled 2.6% of all accounts.

The trade group said 1.2% of plan participants took hardship withdrawals through September 30 of this year, compared with 1.6% for the same period a year ago and 1.3% in 2009, when the collapse of the subprime housing market led to the Great Recession. Hardship withdrawals since 2019 “may reflect” financial problems stemming from the coronavirus pandemic, ICI said.

A preliminary review of the data shows that 2.2% of participants stopped contributions to their retirement plan in the first three quarters of 2020, compared with 1.9% in the same period a year ago and 5.0&% in the first three quarters of 2009, the trade group said.

At T. Rowe Price, a global investment management firm based in Baltimore, 5.7% of those saving for retirement reduced their monthly contributions during the worst of COVID-19 pandemic, but only 2.5% stopped saving.

“Employment is the hinge,” Joshua Dietch, head of Retirement Thought Leadership at T. Rowe Price, told Newsweek.

“People who were employed by-and-large stayed the course,” he said. “Many people who took distributions have solidified their finances and are saving again – and even saving more. In effect, they’re trying to catch up.”

Most people who automatically enrolled in a retirement plan through their employer didn’t budge. But some were forced to dip into their retirement fund during the worst of the pandemic, and that underscores the need to have an emergency fund separate from the retirement account, he said.

“It’s a mistake to lose that balance,” he said.

Among retirement plan participants with assets greater than $25 million, 84% had access to distributions under the CARES Act. But of that group, only 7% took coronavirus-related distributions. But 17% of those took the maximum allowed, or the lesser of 100% of their vested account balance or $100,000, T. Rowe Price said in a report.

However, an online survey conducted by Edelman Financial Engines from August 27 to September 1 of 2,000 U.S. adults aged 40 to 65 with annual household incomes of $100,000 or more found that 26% have withdrawn money from their retirement or savings accounts during the COVID-19 pandemic to help a family member or a friend, and 51% tapped reserves to pay bills.

Those who withdrew money said it will take about six years to replenish their savings.

Persons who depend entirely, or heavily, on Social Security for retirement income represent the other end of the scale.

In 2020, about 65 million people received an estimated $1 trillion in Social Security benefits, including retired and disabled workers as well as dependents, the Social Security Administration (SSA) reported. That means that about 20% of the American population of about 328 million depend on Social Security benefits either directly or indirectly.

There are about 45.8 million retired workers in the U.S. An estimated 90% received Social Security benefits totaling $69.4 billion this year. The average monthly benefit for retired workers is $1,514. For many recipients, including about 21% of married couples and 45% of single persons, Social Security provided 90% or more of their monthly income, the SSA said.

Next year, Social Security recipients will receive a 1.3% cost-of-living adjustment – the smallest since 2017. For those receiving the average payment of $1,514 in December, the benefit will increase $19.68 a month.

Despite the current rebound and the prospect of an effective COVID-19 vaccine allowing things to return to normal, market turbulence is likely to continue. The S&P 500 declined about 20% in the first quarter, but the index recovered, and in the third quarter was up 5.6% from year-end 2019, plumping up many retirement accounts.

But the ups and downs of the market are not necessarily a bad thing for investors.

“When everyone is scared is not when the market is riskiest,” Betterment Financial’s Egan said. “It’s when people are ebullient.”

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