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Laura Santos, 24, had a million things on her mind. None of them included saving for retirement.
Instead, Santos was thinking about buying her first house in San Diego—and planning to take out a loan from her retirement plan to come up with enough cash to cover the down payment and closing costs.
“It seemed like there would be no damage, that I would be helping out myself by putting a lot of money into my 403(b), then taking it out and getting myself a house,” Santos says.
It was February when she talked to a financial advisor about borrowing from her retirement plan. Santos, an administrative assistant at the University of California San Diego, felt good about the idea by the end of the conversation, even if it meant wiping out her retirement savings.
“The advisor didn’t go over any cons; it seemed like there were only pros,” Santos says. “He told me, ‘You should put a lot of your money into your 403(b) because you can take a loan out for yourself and pay that interest back to yourself.’ I thought to myself, ‘Wow, I can take a loan out and pay myself back?’ I didn’t think there was anything negative about it.”
Then the coronavirus pandemic hit a month later, and everyone’s world turned upside down.
Like Santos, most millennials were already at risk of not achieving a financially secure retirement. The temptation to forgo long-term investments in favor of more immediate expenses has always been a hazard. Now, though, COVID-19 and the recession it caused are making a bad situation worse.
According to a new study from the non-profit Transamerica Center for Retirement Studies, millennials (born between 1979 and 2000) are more likely than older generations to dip into their retirement savings in the current economic climate.
About 33% of millennial workers have already taken a loan or withdrawn money from their 401(k) or similar retirement plan in 2020, or are thinking of doing so, compared to 15% of Gen Xers and 10% of baby boomers.
Millennials under financial pressure are using their retirement account loans to pay off debt, purchase new vehicles, or avoid eviction, according to the study. New legislation passed by Congress this year has temporarily waived some of the penalties and fees usually associated with such a move.
You’ll be more prepared for the unexpected if you have a financial backup plan. Avoid falling back on your retirement savings by cutting your expenses, saving as much as you realistically can, and sticking to a budget.
Still, raiding retirement accounts early in life has serious long-term consequences that should be considered carefully, personal finance experts say.
“As a retirement researcher, it’s very concerning to me that millennial workers are eyeing their retirement accounts as a source of funds to help them get through the pandemic,” says Catherine Collinson, CEO and president of the Transamerica Institute and Transamerica Center for Retirement Studies.
Millennials Face More Of An Uphill Battle Financially
Even before the coronavirus outbreak, many millennials were dealing with precarious economic situations. Many had entered the workforce around the time of the Great Recession, and with more student debt than previous generations.
“Financially I could make a lot more money, but I’m doing okay and I can pay my bills,” Santos says. “I had a lot of debt in college because I was putting everything on my credit cards. And by the end of college, I did take out student loans.”
For many millennials, retiring in a traditional sense has always seemed far-fetched.
According to the study, millennials are more likely to expect to be doing some form of work in retirement. And unlike their parents’ generation, Collinson says many millennials expect their primary source of retirement income to be self-funded through retirement accounts like (401(k)s, 403(b)s, IRAs, or other savings and investments—the very same accounts that a third of them have tapped into this year. Most are concerned Social Security will not be there for them when they are ready to retire.
“Retirement is somewhere in the middle of my priority list. I know I should be contributing as much as I can, but I also think about how I need cash now,” Santos says.
The median retirement savings for millennials today is $23,000, compared to $144,000 for baby boomers and $64,000 for Gen Xers, according to the study.
“On one hand, millennials may be thinking that they have years ahead of them that they can make up for a financial setback to their retirement accounts. But they may not be realizing the magnitude to which it could inhibit the long-term growth of their savings,” Collinson says.
The Pandemic Makes Saving For Retirement Even More Complicated
In normal times, withdrawing funds from your 401(k) account before you reach retirement age is a big no-no.
But these aren’t normal times, and recent stimulus legislation has changed the rules. That means there isn’t a straightforward “yes” or “no” answer to whether you should take a loan or hardship withdrawal from your retirement account.
Collinson says if you’re thinking about it, one of the most important recommendations she can offer is to do your homework before making a decision.
“Look before you leap because it can really inhibit the long-term growth of your savings,” she says. “And when you financially get back on track, you may be in a position where you need to rebuild and it’s really hard to build those savings in the first place.”
Douglas Boneparth, the president and founder of Bone Fide Wealth, says it’s better to exhaust all your other options, such as emergency funds or other easily accessible forms of savings, before tapping into your retirement accounts. But if you have to borrow and can’t cut back on expenses anymore, there are worse places to borrow from than your 401(k), he says.
“It’s not the worst place in the world, but there’s never a good feeling that comes with having to borrow money against something that’s for your future because you need to cover an expense today,” Boneparth says.
While the experts agree that retirement savings could be a crucial lifeline during the pandemic, they also agree that it’s best not to use those funds for unnecessary purchases like a new home.
What Do You Want Your Retirement to Look Like?
With a few decades to prepare, it’s important to take the necessary steps to craft your own strategy and figure out what retirement looks like for you.
On the surface, planning for retirement seems like a largely mathematical exercise. But there’s a lot more to it. While getting your calculator out and crunching the numbers is essential for retirement, it’s also important to visualize what you want your retirement to be like, says Erin Lowry, author of “Broke Millennial Takes On Investing” and a contributor to NextAdvisor.
Having conversations with other generations about retirement could be especially beneficial in the wake of the pandemic. According to the Transamerica Center for Retirement Studies study, nearly 80% of workers across all generations agree with the statement, “Compared to my parents’ generation, people in my generation will have a much harder time in achieving financial security.”
Millennials are more likely to agree with that statement than baby boomers, the survey found.
“Instead of pitting ourselves against boomers, there needs to be some conversation and collaboration. Ask them: What do you wish you had known? What do you wish you had learned when you were our age? What would you have done differently to set yourself up this life? That’s really valuable information for us (millennials),” Lowry says.
Improving Your Financial Knowledge Makes a Difference
Your financial literacy affects every single decision you make about money. But managing your money takes time to understand and to improve on, so seek guidance if you’re ever financially unsure about something.
In Santos’ case, she would have borrowed from her retirement account if she hadn’t watched YouTube videos and done her own research online.
“I started worrying about retirement when I started learning more,” she says. “I asked myself, ‘Am I going to have enough to take care of myself and not be a burden to my children?’”
Retirement planning is just one example of why it’s more necessary than ever to understand your money and how it works. Ultimately, you decide how much you’ll need to retire, what type of account to set your money aside in, and how to invest it.
Whether it’s picking up a few personal finance books or customizing your social media timeline to feature more personal finance experts, it’s important to ask questions and do your research before making any major financial decision—especially when it comes to retirement.
“My situation has been a lot better ever since I started learning about finances. I’ve been watching a lot of first-generation Latinas and people of color who talk about personal finances on YouTube,” Santos says. “And ever since I started learning, I’ve been able to budget and save an extra $700 a month. Before that, I thought I couldn’t make it financially.”