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  • Home>Research & Insights>Investment Briefs>The Retirement Breach Problem

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    The Retirement Breach Problem

    Workers tap into retirement savings to cover other expenses. Holistic planning is needed.

    Jake Spiegel, 12/22/2016

    One of HelloWallet’s first white papers investigated the extent to which workers withdrew money from retirement accounts for nonretirement purposes. Much has changed since we released that paper: HelloWallet was acquired by Morningstar, Leonardo DiCaprio finally won an Oscar, and the Federal Reserve released a new edition of its Survey of Consumer Finances, the foundation for the original analysis.

    Back then, we found that roughly $70 billion had been withdrawn from the retirement plan market and that workers with unmet financial needs, such as having insufficient emergency savings or falling behind on bills, more often withdrew money from, or “breached,” these accounts.

    The original analysis relied on survey data collected in 2010. The most recent version of the survey contains data collected in 2013. Did these issues that threaten retirement security for many workers persist despite a strengthening economy?

    The defined-contribution system works well for millions of workers, but its efficacy can be undermined when funds saved for retirement are instead withdrawn early and used for other purposes. Funds withdrawn early from retirement plans face an additional tax penalty on top of regular income tax.

    Workers across the income spectrum routinely breached their retirement accounts for nonretirement spending. In 2015, for example, U.S. Sen. Marco Rubio, R-Florida, withdrew money from a retirement account to pay for new appliances and his children’s schooling.

    HelloWallet’s white paper, “The Retirement Breach in Defined Contribution Plans,” illustrated the need for more holistic financial guidance.

    Saving for retirement at the expense of saving for emergencies or other short-term spending needs can be counterproductive, if retirement savings are used for nonretirement purposes, such as emergencies or durable goods purchases. It is easier to weather small economic shocks, like unexpected hospital visits and broken appliances, without dipping in to retirement savings if one has sufficient liquid savings.

    And so, it was not surprising that in our original white paper, we found that workers with sufficient emergency savings withdrew funds from their 401(k)s early much less frequently than their counterparts without emergency savings.

    Jake Spiegel is a data analyst, policy research,
    with HelloWallet.