1 in 3 millennials sabotage their retirement savings

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Millennial workers are feeling the effects of the COVID-19 pandemic and the recession that followed. Many have been made redundant and struggling to pay their bills, despite unprecedented government assistance, which has led some to make risky decisions that could haunt them for decades to come.

About one in three millennials have already taken out a loan or withdrawn from their retirement account or are considering doing so, according to one. Transamerica Poll. If you’ve exhausted all of your other options, it’s definitely better than going into debt and ruining your credit, but it doesn’t come without a cost. Here are a few things you need to know before deciding if it’s the right decision for you.

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Withdrawals cost you more than the money you withdraw

When you withdraw money from your retirement account, you might only see a loss of a few thousand dollars, but you overlook the lost investment income that you might have had if you had left that money behind. Withdrawing $ 5,000 today doesn’t seem like a big deal, but if you had left that $ 5,000 alone and they got an average annual rate of return of 7% over 30 years, it would have been worth more than $ 38,000.

The fact that retirement accounts are no longer as good as they were six months ago further complicates this problem. If you wanted to withdraw $ 5,000 from your retirement account in early 2020, you would have had to sell less of your assets to get those funds than if you were trying to withdraw the money now, and that can further slow your progress. towards your retirement savings goals.

This affects everyone who makes early withdrawals from their retirement accounts, regardless of their generation, but it hits millennials especially because their retirement contributions at this point in their careers are so critical. The money you contribute early in your working life has more time to grow, so it ends up being worth more when you retire than the contributions you make later. By withdrawing retirement funds now, you are giving up tens, if not hundreds of thousands of dollars of investment income, and it will take much larger personal contributions in the future to make up for that.

Alternatives to early withdrawals from the retirement account

Before withdrawing money from your retirement account, you should use your emergency fund and any other personal savings you have. You should also do your best to cut spending to the essentials so that you have less money to spend each month. If that’s not enough, explore other options, like a Personal loan, to help you make ends meet. This will, however, give you another monthly payment that you need to worry about, so it may not be right for everyone.

Avoid charging for expenses that you cannot currently pay to a credit card Unless you are in a 0% APR introductory period and are confident enough, you will be able to repay what you owe before the 0% APR period expires. You should also avoid payday loans. Their astronomical interest rates often make debt problems worse rather than better.

What to do if you need to withdraw your retirement funds early

Sometimes there may be no way to get around an early withdrawal from a retirement account. It’s not ideal, but it doesn’t mean the end of your retirement plans, either. All you need to do is develop a new savings plan that takes into account where you are now and where you want to go.

Use a retirement calculator to estimate how much you need to save to retire on your original schedule. If it asks for an estimated rate of return on investments, use 5% or 6% so that your plan is not destabilized by below-average investment growth. Once you’ve entered all of your information, it should tell you how much you need to save per month and overall to reach your goal.

If you are not able to save as much as you need, you may need to rethink your retirement plan. Delay retirement months or years is one of the best ways to consolidate your savings because it gives the money you have more time to grow while reducing the number of years of savings you need. It also gives you more years to contribute to your retirement account.

When you withdraw funds from a tax-deferred retirement account, such as a 401 (k) or traditional IRA, you also need to prepare for taxes this year. The government is giving people the option of spreading distribution taxes related to COVID-19 over three years so they don’t have to bear a very large tax bill this year, so it’s something to consider.

Early withdrawals from the retirement account may be necessary for some people at this time, but it is not a decision you should take lightly. You should only do this if you have exhausted all your other options and understand the consequences of your choice as well as what you need to do about it later.

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