When an emergency strikes, many Americans plan to raid their retirement savings.
That’s the takeaway from a recent private Voya survey of 1,005 Americans. More than 2 in 5 (43%) said they considered their retirement funds as their only form of emergency savings. Black respondents, mothers, and those with lower incomes were more likely to depend on those funds for emergencies.
The results underscore the ongoing need to help more Americans prepare for an unexpected event that requires a quick influx of cash.
“Savings rates go down and hardship withdrawals and loans go up,” Tom Armstrong, vice president of customer analytics and insight and head of Voya’s Behavioral Finance Institute for Innovation, told Yahoo Finance.
It’s not uncommon for folks to dip into their retirement account. Almost 2 in 5 have, according to a survey conducted in 2021 by TransAmerica Center for Retirement Studies, including 29% who have taken out a loan and 27% who have taken an early and/or hardship withdrawal.
Some 401(k)s allow workers to take a hardship distribution to pay for emergencies like medical expenses. Depending on the reason for the withdrawal, some workers may have to pay a 10% tax if they’re younger than 59 ½. A 401(k) loan, on the other hand, must be repaid to the employee’s account plus interest on a set repayment schedule. If the loan is not paid back on schedule, it may be considered a distribution, subject to tax and penalties.
“According to our own retirement plan participant data at Voya, employees without adequate emergency savings are 13 times more likely to take a hardship withdrawal from their retirement plan,” Armstrong said.
Respondents with household incomes under $50,000, women with children at home, and Black workers were more likely to say they only had retirement savings to turn to in extreme financial circumstances, Armstrong said.
“It’s not surprising that African-Americans and women use retirement savings for emergency savings,” Kia McCallister-Young, director of the nonprofit America Saves, told Yahoo Finance. “With the gender wage disparity, it makes complete sense.”
In 2022, white women made 83% as much as white men. Black men earned 76% as much as white men. Black women only earned 70% as much as white men.
McCallister-Young said that since many minority women often support other relatives, it’s doubly hard to save for an emergency when “we have to take care of our grandparents.” She also noted that even if people have short-term needs, there are still long-term ramifications of early hardship withdrawals. Not only do workers have less savings overall for their long-term security, there’s also the accompanying taxes on the withdrawal that must be paid off within three years.