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 COVID-19 Information from ACCC

Survey: Americans Start Tapping 401(k), Other Retirement Funds

 

August 10, 2020 | By Terri Williams 

 

The COVID-19 pandemic has caused global financial uncertainty. However, the U.S. has been hit particularly hard. Heading into August with over 4.6 million cases, and over 155,000 deaths, the country’s handling of the pandemic has caused many Americans to have less confidence in the economy.

A June poll by American Consumer Credit Counseling, a nonprofit credit counseling agency, reveals an increase in Americans who report having zero confidence in the U.S. economy. In the Q2 poll, the percentage of those with zero confidence rose to 23%, which is a 7% increase from the March poll.

The majority — 80% — of respondents say they were impacted by the COVID-19 shutdown. As a result, 22% of respondents say they’ve borrowed from their 401(k) accounts or other retirement savings.

The survey polled Americans between the ages of 25-65 who had incomes of $100,000 or less. While 27% of respondents stated that their employment was “very stable,” and over a quarter were “very confident” about their employment over the next six months, that’s just a little over half of the respondents. The number of people collecting unemployment has declined significantly, but those who are just had the rug pulled out from under them. The $600 per week Pandemic Unemployment Assistant program expired at the end of July, and as of this writing, no new deal has been reached.

In addition, now that coronavirus cases are increasing in not only urban, but also rural areas, consumer confidence may be even lower, and the percentage of people tapping into retirement savings may increase.

According to the Federal Housing Finance Agency, both Fannie Mae and Freddie Mac will extend the moratorium on foreclosures until Aug. 31, which represents a two-month extension. However, renters may not be as lucky. The COVID-19 Eviction Defense Project estimates that between 19 and 23 million families that rent are at risk of losing their homes by Sept. 30.

Some consumers may be tapping into their retirement accounts for mortgage and rent payments, while others are faced with auto payments, student loans, and credit card payments.

Katie Ross, education and development manager for American Consumer Credit Counseling, advises readers against taking money out of their retirement accounts unless absolutely necessary. Instead, she recommends the following:

“Retool your budget by taking a deep dive into your income and expenses.” She says you should evaluate all sources of income. “Track all expenses including fixed, variable, periodic, and everything in between.”

She also recommends having an emergency fund to supplement your income, which can be used to cover monthly expenses. If you don’t have an emergency fund, she recommends that you cut back or eliminate all non-essential items, and put nice-to-haves on hold temporarily. “Prioritize your spending on housing, utilities, and food,” Ross says.

For example, if you have a premium cable package, consider slashing it to just the basic services. Instead of eating out or buying prepared food, start cooking at home. This might be a good time to switch to generic brands of many grocery items.

Instead of blasting the AC all day, use ceiling fans to help circulate the air. Also, cook and do laundry during the coolest parts of the day — or at night.

Ross also recommends reaching out to lenders and landlords and discuss your options. “Reach out to utility companies to negotiate a budget plan, credit card issuers for a deferment, and auto lenders to see what concessions they may have to help you out,” she says.

“Under the CARES Act, consumers are protected from eviction, and federal student loans are temporarily suspending payments until September 30, 2020 with no interest being charged.” However, she notes that this does not apply to private student loans, so you would need to contact them separately.

Ross says it’s also important to be proactive instead of avoiding your issues and letting your debt snowball. “Also, monitor your budget weekly and monthly and make adjustments as necessary.”

Finally, if you have a 401(k) retirement account, she says you should consider reducing or eliminating your contributions temporarily. “Under the CARES Act, you can borrow against your 401(k) up to $100,000 without any penalties,” Ross explains. “You are allowed a three-year payback period, plus taxes.”

However, she issues this caution. “If you default on paying yourself back, you will get hit with the 10% early withdrawal penalty.”

American Consumer Credit Counseling (ACCC) is a non profit credit counseling agency offering services such as debt advice, debt consolidation programs, and consumer bankruptcy counseling. We have provided thousands of families with financial counseling and helped them with consolidating bills and paying off credit cards. For consumers in need of bankruptcy counseling, ACCC is approved by the Department of Justice to provide both pre bankruptcy credit counseling and post-bankruptcy debtor education.

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