Please ensure Javascript is enabled for purposes of website accessibility

3 Dangerous Financial Moves Americans Are Making Due to COVID-19

By Maurie Backman – Jun 13, 2020 at 11:23AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

You may be tempted to follow suit, but here's why you shouldn't.

Now that COVID-19 has been active in the U.S. for a solid three months, the financial effects of the crisis are becoming increasingly evident. Of course, it's hard to gloss over the fact that unemployment levels have been in double digit territory for the past two months, but even those who haven't lost income may be struggling in other ways, and taking steps to cope with the financial stress they may be under.

TD Ameritrade, in fact, just released a survey that highlights some of the moves Americans are making in light of the pandemic, and while it did find that 16% of U.S. adults are increasing retirement plan contributions, it also unearthed some disturbing trends. Here are three that are particularly discouraging.

Closeup of older man with serious expression

Image source: Getty Images.

1. 14% of Americans decreased retirement plan contributions

Given the number of people who are out of work right now, it's not shocking to see that a large number have cut back on funding a 401(k) or IRA. Additionally, 22% of Americans haven't taken this step yet, but are thinking about it.

If you've lost your job, it stands to reason that your retirement savings may need to take a backseat while you cover your immediate bills. But if your income has held steady, then it really pays to stay the course on the savings front.

Imagine you contribute $2,000 less to your 401(k) or IRA this year because you're worried about money, and your investments in that account normally generate an average annual 7% return (which is a few percentage points below the stock market's average). If you're 30 years away from retirement, you'll wind up over $15,000 short by virtue of that alone when you factor in lost investment growth. And that's a lot of money to give up.

2. 10% have borrowed against their retirement savings

If you have a 401(k) and need money, taking out a loan against it may seem like a good idea. After all, it's much easier to borrow money that's already yours than to plead with a bank to lend you some.

But borrowing from a 401(k) is a move that can backfire. If you don't pay your loan back in time, it will be treated as an early withdrawal -- one that's subject to a 10% penalty if you're not yet 59 1/2 years of age. Plus, if you lose the job that's associated with that 401(k), you'll need to pay back that loan immediately, and if you don't, you risk that same penalty.

If you need to borrow money, a home equity loan or line of credit may be a safer bet. And if you don't own a home, you can try taking out a personal loan from your bank.

3. 10% have taken an IRA withdrawal; 11% have withdrawn from a 401(k)

The CARES Act, which was passed in late March to provide COVID-19 relief, gives savers of all ages the right to remove up to $100,000 from a retirement plan penalty-free, provided the need to do so can be tied to the COVID-19 crisis (such as the loss of a job). While you may have no choice but to tap your retirement plan if you have bills you can't pay, be sure to explore all other options before going this route.

Any money you remove from your savings today is money you won't have available in retirement, and you'll also lose out on investment growth associated with that sum. Going back to our example, if you're 30 years away from retirement and you remove $5,000 today, you'll wind up with $38,000 less as a senior because you'll have lost out on so much growth (this assumes the same 7% return used earlier). Furthermore, if your retirement plan value is down and you liquidate investments to access money from it, you'll effectively lock in losses you could've otherwise avoided by waiting things out.

Many Americans are desperate right now, and are making tough choices because of COVID-19. If you're in a tough spot, explore your options for relief -- ask to put your mortgage into forbearance, request more time to pay your auto loan, and see if your utility companies will let you defer some payments. But don't rush to make the above moves unless you're truly out of options, because if you do, you might sorely regret it later.

The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
329%
 
S&P 500 Returns
106%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/26/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.