Correction:
A previous version of this story incorrectly described the type of tax penalty Americans face when withdrawing money from their retirement funds.
Video: More than one in four workers in the U.S. take money out of their retirement savings accounts to pay for day-to-day expenses. But dipping into the 401(K) early is adding up for lots of future retirees. Post economics reporter Michael Fletcher explains.
“Encouraging or enabling people to spend down retirement money in anything other than the most severe circumstances is a terrible mistake,” said David C. John, a senior fellow at the Heritage Foundation who studies retirement policy.
But millions of Americans, caught between flat wages and high expenses for everything from sending children to college to making home repairs, feel as though they have little choice. The withdrawals have grown substantially in the wake of the financial crisis.
(The Washington Post/Source: Author’s analysis of the 2010 SCF and SIPP; Argento, Bryant, and Sabelhaus (2012); Abstract of 2010 Form 5500 Annual Reports) - The comparative value of the Retirement Breach problem
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In 2010, 28 percent of participants reported having an outstanding loan against their retirement accounts, an all-time high, according to a survey of 110 large employers by Aon Hewitt, a human resources consultancy. And nearly 7 percent of employees took hardship withdrawals that year — roughly a 40 percent increase since the recession, while 42 percent of workers cashed out their plans rather than rolling them over when they changed jobs.
Charlotte Knox, 62, has worked as a housekeeper at Baltimore’s Hyatt Regency hotel since 1984. She earns $13 an hour, is struggling to recover from a hip replacement and is planning to retire next month. But partly because of past withdrawals, her 401(k) balance is only $60,000, which is all she has to supplement her Social Security.
“I don’t have any money,” she said. “I’m just taking it a day at a time. That’s all I can do.”
Overall, about a third of American households participate in 401(k)-type accounts, which hold a combined $3.5 trillion in assets. But a large portion of that money does not make it to retirement. A recent study by Boston College’s Center for Retirement Research found that the typical household approaching retirement age has an average of $120,000 in retirement savings, enough for roughly a $7,000-a-year annuity.
“401(k)s are not being used for retirement by a large and growing share of workers because they are misaligned with the very basic financial problems most workers face and must address,” said Fellowes of HelloWallet, which provides benefits advice to companies.
Federal policymakers and employer retirement managers have focused little on the threat to retirement security posed by premature withdrawals from savings plans and instead have worked to devise ways to get workers to put more money into the accounts at an earlier age.
In 2006, employers were given broader latitude to enroll employees in 401(k)-type plans unless workers asked not to participate. Just this year, the annual limit for 401(k)-type contributions increased from $17,000 to $17,500 for workers under age 50 and from $22,500 to $23,000 for those who are older. Meanwhile, the Saver’s Tax Credit provides up to $1,000 to help low-income workers build retirement savings.
Many employers have embraced 401(k) and other defined-contribution accounts as a way of helping workers save for retirement while relieving themselves of the financial risks that come with managing a traditional pension plan. In theory, 401(k) accounts are better suited to an economy in which workers are changing jobs more frequently than ever because the accounts can be rolled over from previous employers.
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