Debt, Homeownership Driving Participants to Withdraw Retirement Funds

Data about retirement plan participant loans and hardship withdrawals supports the need for better financial wellness programs, especially for Millennials and Gen Xers.

Approximately 52% of respondents admit to tapping their retirement savings account early for a purpose other than retiring, according to a survey by MagnifyMoney.

The MagnifyMoney survey was fielded among 1,029 Americans. The Investment Company Institute’s (ICI’s) larger database shows around 1% of participants taking withdrawals quarterly and around 15% taking loans quarterly. The percentage can be higher or lower depending on the quarter.

No matter what percentage are withdrawing money through their retirement savings it is likely for the reasons MagnifyMoney found. The two main reasons respondents cited for withdrawing money from their retirement savings are home ownership and personal debt. According to the survey, 23% of those making an early withdrawal did so to help pay down non-medical debt, while 17% needed the money for a down payment on a home.

Likewise, Fidelity data shows debt and homeownership are driving participants to withdraw funds. A 2016 Fidelity participant panel survey among 743 respondents found 31% of participants use loans for paying down/paying off high-interest credit card debt, 24% for home improvement or repairs, 21% to buy a home or refinance a mortgage and 19% to pay outstanding bills.

According to MagnifyMoney, older savers are less likely to withdraw money from their retirement plans than younger savers. Fifty-four percent of Millennial savers say they’ve taken an early withdrawal from a retirement savings account, compared with 50% of Gen Xers and 43% of Baby Boomers. “This stands to reason considering that many Millennials have now entered the stage of life where they are getting mortgages, starting families and taking on bigger financial obligations while also being decades away from the traditional retirement age,” MagnifyMoney says.

Millennials are also more likely to say that raiding their retirement savings is justified under certain circumstances, at 39%. One-quarter (26%) of Gen Xers and 17% of Baby Boomers say the same.

However, Fidelity’s findings are a little different. Data from the end of the second quarter, looking back at the previous 12 months, shows 8.3% of Millennials initiated loans from their plan accounts and 7.3% of Baby Boomers did so. However, 11.5% of Gen Xers initiated loans from their plan accounts.

Though the percentages were lower, there was a similar pattern for taking hardship withdrawals. Three percent of Millennials and 1.1% of Baby Boomers took hardship withdrawals, while 3.3% of Gen Xers did so.

The data supports the need for financial wellness programs, especially for Millennials and Gen Xers. Fewer employees feel their compensation is keeping up with their cost of living.

Kent Allison, a partner and national leader of PwC’s Employee Education and Wellness Practice, tells PLANSPONSOR financial wellness programs need to holistically cover all of the financial challenges an individual might be facing, not just retirement savings. According to Cerulli Associates, the way to help employees improve their financial situation is to make financial wellness programs action-oriented.

More employers are focused on improving employees’ financial wellbeing, yet how employees feel about their financial situations doesn’t appear to be getting substantially better, finds the Alight Solutions’ Health and Financial Wellbeing Mindset Study 2019. The firm offers suggestions for how plan sponsors can improve their financial wellness programs.