Stealing From Peter To Pay Paul

It should come as no surprise that Americans who have recently lost jobs, and there are roughly 40 million of those, are now tapping into whatever retirement account that they have to help bridge the loss of their paycheck. According to MagnifyMoney, the average withdrawal is roughly $6,800. Given that 70% of those that now find themselves on unemployment contributed <$1,000 in the last year, the average withdrawal is substantial.

The CARES Act is permitting penalty-free withdrawals (up to $100,000) for those not yet 59 1/2 years old. This may be enticing some to take these early withdrawals, but for many American workers these premature withdrawals are proving to be necessary to pay for basic needs, such as groceries and rent. It is shameful that many working Americans still can’t earn enough to cover their basic living expenses, let alone save for retirement. The American middle class has been substantially reduced, as costs associated with housing, education, food, healthcare, insurance, transportation, etc. have ballooned and the labor force has been transformed into a “on-call” work force.

The Covid-19 crisis may be the final nail in the financial future for many Americans. What we need to do is seek ways to help these fragile households gain access to some emergency funds without having to tap into their retirement accounts. There have been a variety of discussions related to creating side-pocket accounts that would receive payroll, tax-deferred deductions that could fund these emergency savings accounts. I would recommend that 50% of each $ contributed goes into an emergency fund until $1,500 has been saved. Any contributions above that amount would go to fund a retirement account, although SimplyWise is reporting that 70% of those folks that recently lost their jobs contributed <$1,000 in the last year. This once again highlighting how little the average American is able to save after meeting their everyday needs.

We can and should do better. The movement to an on-call work force is destabilizing the American household and fueling the economic crisis that has unfolded during the last eight weeks. A good percentage of American households had seen their wealth fail to regain levels achieved prior to the Great Financial Crisis despite a 10+ year bull market for equities. The additional hardship brought about by Covid-19 may be too much for many to overcome. It is shameful!

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