Do you have a 401k, IRA, or any other type of retirement savings? Has the global economic recession altered how you approach investing for your retirement? With the lack of trust on Wall Street as well as long time investors losing most of their investment nest egg – many people are now changing the way they invest for their retirement years. Unfortunately, many of these changes include reducing the amount contributed or worse – a complete withdrawal of funds from the account.
The reasons for reducing contributions to a retirement savings account vary, but overall people are strapped for cash and are looking for money to pay their bills. In some cases, an employee may decide to cut back on their individual contributions from a company sponsored retirement savings plan to make more cash available in the short term. In more extreme cases, investors are pulling the entire savings out of their retirement accounts so they can stay afloat and get back on their feet.
While reducing retirement savings contributions or withdrawing money from an IRA account may be the only option for some people, here are 3 reasons why you should think twice about doing so.
- Tax Implications – Reducing your contribution percentage from a company sponsored 401k plan, for example, will increase the amount of taxes you end up paying. Remember that reducing your elections does not translate into a dollar for dollar savings in your paycheck. Instead, you will pay more taxes and get a lower amount back than you may have originally expected.
- Early Withdrawal Penalties – Those looking to cash out of their IRA retirement savings plan, for example, will get hit with huge penalties. While you may need the cash to make ends meet, be sure this is your absolute last resort before making this decision. The penalties you will be forced to pay are probably not worth it.
- Company Match – If your employer has a company sponsored retirement plan that they match, be sure to continue to take advantage of that offer. While many companies are cutting out the retirement savings sponsorship, there are still many that offer it. If a company matches dollar for dollar up to 5%, then be sure to continue to elect at least 5%, regardless if you decrease your elections. That company match is an opportunity you should not ignore!
The Non-Savers
While the statistics on investors reducing their retirement savings investments is a concern, what is even more troubling are the thousands of people who have never saved a dime for their retirement. I have known (and still do) several people who have jobs that don’t take advantage of their company sponsored retirement savings plan. I also know people who had contributed to a retirement plan at a former job and instead of rolling it into another plan when they left, they decided to cash out. Both of these examples were several years back when their was strong economic growth. I can only expect that these numbers are rising as people are looking for extra cash or don’t care about saving for their retirement – especially in a recession.
Final Thoughts
I am concerned about the impacts from the lack of managing retirement savings for thousands and thousands of people will have on our economy over the next 50 years. While times are very tough right now, what will happen when all of these individuals are at their retirement years with no savings? They most certainly will be forced to work later in life, but what kind of impact will this have on our workforce? Or worse yet, what kind of impact will this have on our government aid programs for retirees?
Next Steps
I completely understand that times are very tough and people need cash. Turning to your retirement savings may be your last resort before bankruptcy to pay the bills and put food on the table. However, I encourage anyone to keep investing into their retirement savings if they can. Make sacrifices elsewhere and only look to your retirement savings as a last resort.
It is also understandable for investors to be cautious about investing again – especially into a retirement savings account that has lost a lot of its value in the last several months. I know that I lost well over 30% in my account just last year. If you are still unsure about getting back into the market, then put your money into a certificate of deposit or FDIC insured savings account. The point is to keep investing a portion of your income now so you can benefit in the future!
Have you cut back on your retirement savings as a result of the global economic recession?
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Great post. You really do have to manage your retirement savings! You must be proactive, do research, and be informed. Don’t trust someone else to do it for you, especially if they are getting a commission. Sadly, most people only spend 30 MINUTES PER YEAR on their retirement planning! That is crazy!
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Agreed! Most people I know don’t care at all about their retirement. I can understand living for the now, but you still need to think about your long term future.