In 2017, nearly one third of employees withdrew funds from a retirement account for expenses other than retirement. That is the data presented by PwC in their 2017 Employee Financial Wellness Survey. If this survey is representative of the general population then this should be cause for concern.
Increase in Young Employees Tapping Retirement Accounts
The survey interviewed more than 1,600 employed adults in a sample representative of U.S. demographics for age and gender. The survey found that in 2017 35% of Millennials had already withdrawn funds from their retirement account for other expenses, this is an increase of almost 15% from 2016. Gen X and Baby Boomer employees are also making early withdrawals, 32% and 20% respectively, with Gen Xers showing around a 6% increase over 2016.
Additionally, many employees think it’s likely they will need to use retirement funds for non-retirement expenses in the future. The majority of Millennials (51%) think they will need to tap into retirement accounts to meet other expenses with Gen Xers hot on their heels at 47%.
Interestingly, the survey delved into the reasons for these early withdrawals. The top reason for each generation was to handle unexpected expenses with 51% of Millennials, 57% of Gen Xers, and 53% of Baby Boomers reporting this as their top reason. This would seem to correlate with other studies which seems to indicate that the majority of American do not have the savings to cover an unexpected expense of even several hundred dollars.
For those that made early withdrawals, the second most frequent reason was to pay for medical expenses with 22% of Millennials, 18% of Gen Xers and 24% of Baby Boomers citing this reason. One wonders, given the quickly rising costs of healthcare and health insurance, whether these trends will continue as more people struggle to pay for medical expenses.
As a final data point, many of those surveyed said they would contribute less to their retirement account if loans or other early withdrawals were restricted. Contributing less to retirement is clearly not a good scenario.
The survey results indicate that large numbers of younger workers are taking money out of their retirement accounts. Necessity aside, many of these younger workers may feel that they have many years to catch back up on their savings. However, this can be a big miscalculation and a misunderstanding of how compounding and time helps younger employees but only if there is money in the account. Depending on the withdrawal type, those who withdrawal early may be hurting themselves further if they are paying the 10% early withdrawal penalty.
This trend may highlight one of the deficiencies of the robo-advisors that many younger DIY retirement planners favor. A robo-advisor will not provide the personalized advice on early withdrawals or show the impact of early withdrawals down the road in retirement. The robo-advisor will only reflect the account balances and future account projections after the withdrawal has taken place when it is already too late!
This would seem to be a key area for advisors to demonstrate their value in helping employees, particularly Millennials and Gen Xers, understand the impact early withdrawals will have on their retirement readiness. Once employees realize how harmful these early withdrawals can be, they will be looking for another option. This is where advisors, using financial wellness and personal finance concepts, can help employees think about, budget, and save for unexpected expenses and medical bills that will inevitably occur from time to time. Helping younger employees anticipate and pay for these expenses out of their savings will help them protect their retirement accounts and improve their chances of a healthy retirement.
These early withdrawal trends should be a concern. Advisors can help employees, particularly younger ones, understand the detrimental impact of taking early withdrawals as well as help them make changes to prepare for and handle life’s unexpected expenses.
The Retirement Analysis Kit (TRAK) Helps Advisors Educate
The Retirement Analysis Kit (TRAK) is powerful retirement planning software designed to help advisors connect with and educate their clients. TRAK has several tools such as the Interest Calculator and the Gap Analysis that can help advisors illustrate the impact of taking early withdrawals from a retirement account. These solutions make it easy for a client to understand how this decision will affect them in retirement and understand what they stand to lose, which is particularly powerful for younger clients. Try a free demo of the software and find out how TRAK can help you educate your clients and grow your business.