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Millennials plunder their retirement funds

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24-year-old Laura Santos had a million things on her mind. None of them included retirement savings.

Instead, Santos was considering buying his first home in San Diego and planning to take out a loan under his retirement plan so that he had enough money to cover the down payment and closing costs.

“It looked like there would be no harm, that I was going to help myself by putting a lot of money in my 403 (b), then taking it out and buying myself a house,” says Santos.

It was in February when she spoke to a financial advisor about borrowing from her retirement plan. Santos, an administrative assistant at the University of California, San Diego, was happy with the idea at the end of the conversation, even if it meant wiping out his retirement savings.

“The advisor didn’t talk about any downside; it seemed like there were only pros, ”says Santos. “He said to me, ‘You should put a lot of money in your 403 (b) because you can take out a loan for yourself and pay that interest back to yourself. I was like, “Wow, can I take a loan and pay myself back? I didn’t think there was anything negative about it.

Then the coronavirus pandemic struck a month later, and everyone’s world turned upside down.

Like Santos, most millennials were already in danger not to achieve a financially secure retirement. The temptation to forgo long-term investments in favor of more immediate spending has always been a risk. Now, however, COVID-19 and the recession it has caused are making matters worse.

According to a new study From the nonprofit Transamerica Center for Retirement Studies, Millennials (born between 1979 and 2000) are more likely than older generations to tap into their retirement savings in today’s economic climate.

About 33% of millennials have already taken out a loan or withdrawn money from their 401 (k) or similar pension plan in 2020, or are considering doing so, compared to 15% of millennials and 10% baby boomers.

Millennials under financial pressure are using loans from their retirement accounts to pay off debts, buy new vehicles or avoid eviction, the study finds. New legislation passed by Congress this year has temporarily waived some of the penalties and fees generally associated with such a movement.

Pro tip

You will be better prepared for the unexpected if you have a financial safeguard plan. Avoid falling back on your retirement savings by cutting spending, saving as much as possible, and staying on a budget.

Still, looting retirement accounts early in life has serious long-term consequences that need to be carefully considered, according to personal finance experts.

“As a retired researcher, I find it very concerning that millennial workers view their retirement accounts as a source of funds to help them weather the pandemic,” says Catherine collinson, CEO and President of the Transamerica Institute and the Transamerica Center for Retirement Studies.

Millennials face an uphill financial battle

Even before the coronavirus epidemic, many millennials faced precarious economic situations. Many had entered the workforce during the Great Recession and with more student debt than previous generations.

“Financially, I could make a lot more money, but I’m fine and I can pay my bills,” Santos says. “I had a lot of debt in college because I put everything on my credit cards. And when I finished my studies, I took out student loans.

For many millennials, retiring in the traditional sense has always seemed overkill.

Millennials are more likely to expect to work in retirement, according to the study. And unlike their parents’ generation, Collinson says many millennials expect their primary source of retirement income to be self-funded through retirement accounts such as (401 (k) s, 403 (b) s, IRAs or others the same accounts a third of them have operated this year. Most fear Social Security is not there for them when they are ready to retire.

“Retirement is somewhere in the middle of my priority list. I know I should contribute as much as possible, but I’m also thinking about how I need the money now, ”Santos says.

The median retirement savings for millennials today is $ 23,000, compared to $ 144,000 for baby boomers and $ 64,000 for Gen Xers, according to the study.

“On the one hand, millennials may think they have years ahead of them to make up for a financial setback in their retirement accounts. But they might not realize how much that could hamper the long-term growth of their savings, ”Collinson said.

The pandemic makes saving for retirement even more complicated

Normally, withdraw funds from your 401 (k) account before reaching retirement age is a big no-no.

But these are not normal times, and recent stimulus legislation has changed the rules. This means that there is no straightforward “yes” or “no” answer to whether you should withdraw a loan or a hardship withdrawal from your retirement account.

Collinson says that if you think about it, one of the most important recommendations she can offer is to do your homework before making a decision.

“Look before you take the plunge, because it can really hamper the long-term growth of your savings,” she says. “And when you get back on track financially, you might be in a position where you have to rebuild and it’s very difficult to realize those savings in the first place. “

Douglas Boneparth, president and founder of Bone Fide Wealth, says it’s best to exhaust all your other options, such as emergency funds or other easily accessible forms of savings, before you dip into your bank accounts. retirement. But if you have to borrow and can’t cut spending any longer, there are worse places to borrow than your 401 (k), he says.

“It’s not the worst place in the world, but there is never a good feeling in having to borrow money for something that is for your future because you have to cover an expense today,” explains Boneparth.

While experts agree that retirement savings could be a crucial lifeline during the pandemic, they also agree that it is best not to use those funds for unnecessary purchases like a new home.

What do you want your retirement to look like?

With a few decades to prepare, it’s important to take the necessary steps to develop your own strategy and determine what retirement looks like for you.

At first glance, planning for retirement seems like a largely mathematical exercise. But there is much more. While it’s essential to pull out your calculator and work out the numbers for retirement, it’s also important to visualize what you want your retirement to look like, says Erin Lowry, author of “Broke Millennial Takes On Investing” and a NextAdvisor contributor.

Having conversations with other generations about retirement could be particularly beneficial in the aftermath of the pandemic. According to the Transamerica Center for Retirement Studies study, nearly 80% of workers of all generations agree with the following statement: “Compared to my parents’ generation, people of my generation will have a lot more struggling to achieve financial security. ”

Millennials are more likely to agree with this statement than baby boomers, according to the survey.

“Instead of opposing the baby boomers, there needs to be conversation and collaboration. Ask them: What would you like to know? What would you have liked to learn at our age? What would you have done differently to set yourself up for this life? This is really valuable information for us (millennials), ”says Lowry.

Improving your financial knowledge makes the difference

Your financial literacy affects every decision you make about money. But managing your money takes time to understand and improve, so seek advice if you are ever unsure about something financially.

In Santos’ case, she would have borrowed from her retirement account if she hadn’t watched YouTube videos and done her own research online.

“I started to worry about my retirement when I started to learn more,” she says. “I asked myself, ‘Am I going to have enough to take care of myself and not be a burden on my children?’ “

Planning for retirement is just one example of why it’s more necessary than ever to understand your money and how it works. Ultimately, you decide how much you need for retirement, what type of account to put your money aside, and how to invest it.

Whether it’s picking up a few personal finance books or customizing your social media calendar to be on it more personal finance expertsIt’s important to ask questions and do your research before making any major financial decision, especially when it comes to retirement.

“My situation has improved a lot since I started learning about finances. I watched a lot of first generation Latinas and people of color talk about personal finance on YouTube, ”Santos says. “And since I started learning, I have been able to budget and save an additional $ 700 per month. Before that, I thought I couldn’t do it financially.