How COVID-19 is changing retirement plan savings

Borrow money from retirement funds

A third of active pension plan participants have borrowed money from their retirement plans as a result of COVID, according to a 2020 report by Edelman Financial Engines. Up to 60 percent of these borrowers can tap into retirement funds again if necessary, and an additional 10 percent are evaluating whether to take out a loan or a distressed retirement. Despite these actions, 55 percent of borrowers later regretted their decision to borrow. Many borrowers said they did not understand the tax and penalty implications.

The Internal Revenue Service (IRS) issued the COVID Tax Advice 2020-85 on July 14, 2020. In the statement, the IRS warns that qualified individuals affected by COVID-19 can withdraw up to $ 100,000 from their eligible retirement plans. . including IRA accounts, between January 1 and December 30, 2020. These coronavirus-related distributions are subject to regular tax, but not the additional 10 percent tax on distributions. The funds must be repaid in three years. Certain qualifications must be met. Plan participants will want to speak with their tax advisor and plan sponsor for more details.

While making it easier to borrow from retirement savings, the US government is also taking steps to encourage longer-term savings. The Setting Up All Communities for Retirement Enhancement Act (SECURE) was signed into law on December 20, 2019, just prior to the outbreak of COVID. For those pension plan participants who have some financial flexibility, the SECURE Act establishes that the required minimum distributions (RMD) of 401 (k) and defined contribution plans can be deferred until age 72, instead of 70 ½.

Early Retirement Due to COVID-19

A September 2020 survey by pension consultancy Simply Wise reports that 10% of Americans in their 50s and 60s now plan to retire earlier than expected. In many cases, this is triggered by a COVID-related job loss. They also report that more than a quarter of 401 (k) plan participants are considering accessing their pension savings early to meet their financial obligations.

A national survey of educators conducted by the National Education Association in August also reports that many teachers plan to retire early or seek new employment as a result of COVID. Most of the surveyed teachers with 30 or more years of teaching experience (55 percent) plan to leave the profession. This compares with 20 percent of teachers with less than 10 years of experience and 40 percent of educators who have been teaching for two to three decades.

The COVID pandemic is pushing four million older workers out of the workforce and into unplanned early retirement, according to an August 2020 report from Forbes magazine. This translates to a 7 percent job loss for workers ages 55 to 70, compared to a 4.8 percent reduction for workers under 55. These early retirements shorten the time workers would have to keep saving for their future.

Post-COVID pension contributions

According to research reports from Fidelity Investments and T. Rowe Price, the majority of 401 (k) plan participants are holding onto their pension investments despite the market turmoil that has accompanied the COVID-19 pandemic.

Fidelity reported in August 2020 that 9 percent of 401 (k) investors increased their contribution rate, while only 1 percent stopped their contributions. T. Rowe Price reported in October 2020 that fewer than 10 percent of participants in its pension plans dropped or cut their pension contributions.

On a related note, Fidelity also reported that only 11 percent of pension plan sponsors cut their 401 (k) contribution program that matches employee funds typically for the first 2-3 percent of investment in participants.

Lost jobs disrupt pension savings

There is not much data available on the number of workers who have lost company-sponsored pension benefits as a result of COVID. However, the Society for Human Resource Management (SHRM) recognizes that millions of laid off workers may no longer have access to the automatic deductions and employer match that corporate pension plans offer.

As a result, many workers will need to work longer to save for retirement. For some, they will also need to borrow against retirement funds as they try to rebuild financial security.

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