Half of All Americans Have Made This Retirement Mistake
November 22, 2021
During challenging times, it can be tempting to treat your retirement savings as an emergency fund, but taking an early withdrawal can result in huge fines and fees and set back your retirement plans. Despite this, a recent survey found that most Americans have taken an early withdrawal.
The survey, conducted by Bankrate, found that fully 51% of Americans with a retirement account have taken an early withdrawal, with 20% saying they took one during the pandemic.
Younger Americans were more likely to tap their retirement savings during the pandemic. While only 18% of Generation Z said they took an early withdrawal prior to March 2020, 40% said they had taken one since the pandemic began. Older Americans managed to weather the pandemic better. 34% of Baby Boomers said they had taken an early withdrawal before the pandemic, but only 6% say they have taken one since it began.
It makes sense that Americans who are nearing retirement would be more hesitant to tap their savings, but it is actually more detrimental for younger savers. Early withdrawals from retirement accounts like 401(k)s or IRAs are generally subject to income tax, as well as a 10% additional tax penalty. For young workers, however, there is not only a large cost incurred at the time of the withdrawal but a huge reduction in your account’s eventual balance. Because of the power of compounding, even a small amount taken out today could have multiplied several times over by the time you retire.
The survey also found that the majority of Americans, 52%, feel like they are behind on their retirement savings. There was some good news to be found in the survey. Nearly a quarter of the respondents said they are saving more now than they have in the past, and almost 39% said they have been able to save the same amount, even during the pandemic.