Investor Alert

Oct. 15, 2020, 1:16 p.m. EDT

Should you take a loan from your retirement savings account? These people wish they hadn’t

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Alessandra Malito

In dire times, Americans may consider taking money out of their retirement accounts to fund their immediate financial obligations — but that’s not always the best move, and many of those who have done so regret it now, a new survey found.

Millions of workers either lost their job earlier this year because of the pandemic, or had their hours or pay cut. The coronavirus crisis closed U.S. businesses temporarily, or in some cases, permanently. Meanwhile, Americans were still responsible for paying for the necessities — housing, utilities, groceries and other debts. Some workers with retirement accounts considered, or eventually did, tap into their retirement savings to pay those bills.  

The CARES Act , a stimulus package passed at the height of the pandemic, allowed Americans to borrow more than usual — up to $100,000 — without incurring a penalty. 

But more than half — 55% — of borrowers regret it now, according to a new survey from Edelman Financial Engines. A majority of borrowers who regret their actions — 85% — said they made the decision because they didn’t understand the consequences. 

Actions deemed “detrimental” to employees’ long-term financial security increased 50% since April, and almost half of them (45%) directly harmed retirement accounts, such as borrowing from these funds, reducing savings rates and changing portfolio allocations, Edelman Financial Engines reported. Another 30% of people increased their outstanding debt and 21% reduced or depleted their emergency funds, the survey found.

See: We have $190,000 in retirement savings and want to use the COVID-related distribution rules to pay off $40,000 in debt — should we?

Other investment firms say employees remained disciplined , even amid the chaos this year. Although most employers adopted the CARES Act provision regarding allowable withdrawals and loans, loan usage was down during the second quarter of 2020, according to Fidelity Investments. Principal Financial, which also manages retirement accounts, said loans were down more than 50% between the beginning of 2020 and Aug. 31. compared with the same time frame in 2019.  

Sometimes, workers do have alternatives to tapping into their retirement savings, but don’t know it. For example, of the people who borrowed from their accounts, more than a third said they did so for their housing, according to the Edelman Financial Engines survey, but the CARES Act provided protections to homeowners against foreclosures and renters against eviction. A majority of 401(k) loan borrowers said speaking with an adviser would have helped them, such as to understand the implications of these decisions or provide suggestions for other options.

The consequences of drawing down retirement savings goes far beyond the short-term. Taking that money out of these investment accounts likely means those portfolios will generate less returns, and that will produce a smaller nest egg for Americans when they’re older. If at all possible, financial advisers typically caution investors to refrain from using their retirement savings, and provided that same advice at the beginning of the pandemic.

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