Retirement savings: why you should avoid a New Year’s dip
January 15, 2021, 10:00 CET
Cutting back or borrowing from retirement savings in 2021 to soften the financial strain caused by the pandemic could have long-term negative consequences.
While everybody's experience is unique and personal, many people will feel either physically, emotionally, or financially drained by the fallout from Covid-19. Some are experiencing all these things.
Most of us are hoping the various vaccines coming available will, in the medium term, address the medical risks we face, thereby leading to a reopening of society and help reactivate economic activity.
Time for a new Year dip?
People in acute financial difficulty are naturally looking for more immediate solutions at the start of 2021. Increasingly, this involves either cutting back on or suspending contributions to retirement funds. And, where laws allow, some people are withdrawing or borrowing cash from their retirement funds.
Desperate times sometimes call for desperate measures. A cash injection may be precisely what is needed to bridge the financial turmoil caused by the pandemic. It is not surprising therefore that a considerate number of people are tapping into their retirement savings.
However, Aegon ― as a financial services provider dedicated to helping people achieve a lifetime of financial security ― is at the forefront of cautioning people to be careful here, due to the potential long-term impact on retirement income.
Research published by Aegon and nonprofit Transamerica Center for Retirement Studies (TCRS), shows that an adequately funded retirement was not a given, even in pre-Covid times. "Before the pandemic, the retirement prospects for many workers were iffy at best," according to Catherine Collinson, CEO of TCRS. "The pandemic has exacerbated that situation."
"Millions of workers have experienced negative impacts to their employment, ranging from pay cuts and furloughs to job loss. Some workers have even dipped into their retirement accounts to make ends meet. It will take years for many workers to financially recover – and some may never recover. Help from policymakers is needed to strengthen the U.S. retirement system."
TCRS' research shows how the pandemic has worsened the situation. According to a recent survey, about half of U.S. workers (52 percent) had experienced one or more negative impacts to their employment. The survey also found that 33% of workers had already taken and/or planned to take a loan or early withdrawal from their 401(k)s as a result of the pandemic. Collinson cautions that this will impact the value of people's retirement funds. It will take years to recover losses and some may never recover.
Similarly, Aegon's business in the UK, has sounded the alarm about people opting out of workplace pension schemes or pausing contributions due to the economic strain. People who pay more than the minimum auto-enrollment contribution ― 5% of a band of earnings ― may reduce their contribution levels.
Steven Cameron, Pensions Director at Aegon UK: "While there may be an immediate boost to take-home pay, Aegon analysis shows an employee in their mid-20s on average earnings could lose out on around £18,400 at state pension age if they decrease their contributions by just 1%, or a 9% fall in retirement income. But the saving in take-home pay would only amount to £14 after tax relief."
"The shortfall could be even greater if they are in a scheme where their employer 'matches' their contributions. If their employer also reduces their contributions by 1%, the shortfall would double to £36,800."
Get expert advice
Aegon recommends that you speak to your financial service provider or an independent adviser to discuss your options and the potential implications before taking any significant decisions regarding your finances.