Why Americans Raid Their Retirement Savings

Why Americans Raid Their Retirement Savings

Due to a lot of factors, Americans can’t seem to leave their retirement savings alone. The effects of the financial crisis have made about 30 million people to tap their hard-earned retirement savings, and almost a third of people have touched their 401(k) to pay for other non-retirement expenses. PricewaterhouseCoopers 2017 Employee Financial Wellness survey found out that 44% of people expect this withdrawal to continue in the future.

According to Bankrate.com, Boomers were the ones who are most likely to tap their savings early and even incur a tax penalty. Some 26% of those ages 50-64 say their financial situation has deteriorated, and 17% used their 401(k) plan and other retirement savings to pay for an emergency expense.

For most people, taking money out of retirement savings is a huge and even the worst financial mistake,  especially for boomers, because they have little or no time to replenish back what they have taken. Still, retirement is distant away from now; though your day to day financial needs is still up against you,  there are better solutions to take rather than raiding your retirement savings and snatching yourself a good future.

Related: 12 Retirement Experts Reveal Their Best Retirement Saving Advice for Young People

Here the four common reasons why people are raiding their retirement savings and a better way to manage it instead.

Pay Medical/ Healthcare bills

In a survey made by Kaiser Family Foundation/ New York Times, a quarter of American respondents say that they or someone they live with has problems with paying medical bills. With that, people think that their retirement money is the only source of money to cover the cost of doctor bills and medical services. In a survey conducted by Transamerica earlier this year, of 3,000 American respondents who identified themselves as caregivers, 18 percent of them reported that they had taken loans and withdrawals from their retirement account as a result of becoming a caregiver.

Healthcare expenses are a serious expense. It can send your entire retirement plans down the drain if you haven’t prepared for it ahead of time.

paying healthcare with retirement savings

How to pay Medical bills without using your retirement savings?

Uninsured people are far more likely to experience trouble paying for medical bills than those who have coverage, so are the ones who have high deductible plans.  If you don’t have any insurance, it pays to get coverage now so any emergency health expenses won’t damage your current financial state.

Contribute to a health savings account to help you with your high-deductible plan, co-pays, and other medical costs. If you or your loved one are already a Medicare beneficiaries, look into a Medicare Supplement plan to cover the gaps of Original Medicare. Also known as Medigap, it covers all or part of your deductibles, co-pays and other possible out-of-pocket healthcare costs which are not covered by Original Medicare. Having a Medigap plan can provide you or your loved one a great relief in paying for an expensive health care costs.

Related: Meeting the Challenges of Health Care Expenses

Pay for unexpected expenses

Americans are known to have a bad reputation when it comes to saving for retirement, same goes to saving for an emergency situation. Over half of the survey’s respondents say that they will probably withdraw money from their 401(k) to cover any out-of-the-blue expenses. Unfortunately, a lot of people now see their retirement savings as a buffer for any financial disaster.

How to handle unexpected expenses

Treating your 401(k) or retirement savings as a buffer to any unexpected costs is another grave financial mistake. Every withdrawal you make means loss of potential earnings and a sting in you’re your future.

Instead of relying on your retirement funds to cover unexpected expenses, create a separate account or savings allocated just for this only. It is alright to start small as it adds up over time, the important thing is that you save and allocate for this possible need. You can save more for this budget by cutting some back on to another part of your lifestyle. Also, having a temporary part-time job can make saving for this need grow faster.

Paying debt

This is an expensive way to pay your debts and bills because it doesn’t cost only your money but also your future.  Even if you can get a hardship withdrawal from your retirement savings, the cost is not worth the downfall of your future.

If you are struggling with your debts because of really high-interest rates, only then you can consider paying it through your 401(k) or retirement savings because it is possible that credit interests are higher than the retirement saving growth that you will get.

pay debt using retirement savings

Pay for educational expenses

If you want to help your children finish their college degree, a better way to do it is by planning for it while they are still young. If you begin saving early, it might be enough to cover the educational costs your children need when the time comes.  Others save in a general investment or savings account or participate in pre-paid tuition plans.

But if you haven’t saved enough in time that your kid is already entering college, still don’t resort to breaking your retirement savings. Your retirement should still come first in this situation. Your child can borrow to help him with his educational needs, while you should continue to pay for your retirement savings.

pay education retirement savings

Buy a house

The lenient IRS rules on retirement account withdrawals are very tempting to those first-time homebuyers. Because of what is called as hardship withdrawals, millennials, Gen Xers and baby boomers are eyeing for their retirement withdrawals to buy a home.

Buy a house without using your retirement funds

Before you get excited to take money from your retirement funds and buy yourself a dream house, consider all possible options first. Cut back in other areas of your finances or find ways to have additional income to build up your downpayment fund. There are also down payment assistance program and low-money-down loans that you can avail if what you have is still not enough.


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