By Aimee Picchi
/ MoneyWatch
Risks of early 401(k) withdrawals
If you ask Americans how much they'll need for a comfortable retirement, they'll throw out a big number: $1.25 million, to be exact. But in reality, most workers are far from reaching that goal — and there's a significant chunk of older people who are nearing their golden years without a penny in retirement savings.
About 27% of people who are 59 or older have no retirement savings, according to a new survey from financial services firm Credit Karma. To be sure, that's the same share as the overall population, yet boomers have less time to save for retirement given that the generation is now between the ages of 59 to 77 years old.
The findings come at a time when lawmakers are discussing the health of the Social Security program, whose trust fund is slated to bedepleted in 2033. That would result in a dramatic cut in benefits, with the 67 million retirees who depend on the program receiving only 77 cents for every $1 in benefits — a reduction that would hit the poorest Americans hardest, including those who have nothing saved for retirement.
Fewer younger workers are banking on Social Security to supply them with income in retirement, according to a separate study from Natixis Investment Managers. Only about half of millennials believe Social Security will factor heavily into their retirement plans, compared with 9 in 10 baby boomers — which indicates the older generation may be less financially prepared than younger Americans if benefits end up getting cut.
"With Social Security, you should hope for the best but prepare for the worst," noted Dave Goodsell, executive director at the Natixis Center for Investor Insight.
He added, "What people need to do, the bottom line, is take a minute to step back and say, 'What do I need to retire, what will my income be,' and then start saving."
Boomers: Dreams versus reality
Boomers say they need $1.1 million for retirement, but the median retirement savings is $120,000 for that generation, Natixis found. To reach their goal, the typical boomer would need to sock away $186,000 annually, the study noted.
About 1 in 5 people over 59 don't have a retirement account, the highest share of any generation, Credit Karma said.
The gap between their goals and the reality of their savings could explain why boomers are pushing up their retirement age, Goodsell noted. For instance, boomers now project their retirement age at 70, while millennials believe they'll step back from work at age 60.
"Boomers have been trying to adapt, and saying, 'We'll work to 70 and get more time'" to save, he noted.
Among those planning on working longer is Daniel Fitzpatrick, a senior planning executive who told CBS Evening News earlier this year that he originally expected to retire at 60. Now 64, he's still working and said he's pushing back his retirement to age 70 — and plans to work part-time afterwards.
"The benchmarks move as I get older," Fitzpatrick said.
Aimee Picchi is the associate managing editor for CBS MoneyWatch, where she covers business and personal finance. She previously worked at Bloomberg News and has written for national news outlets including USA Today and Consumer Reports.
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I'm an expert in personal finance and retirement planning, having extensively studied and advised on topics related to individual investment strategies, retirement accounts, and financial security in later years. My knowledge is not just theoretical; I've delved into numerous studies, real-world scenarios, and market trends, enabling me to provide valuable insights into the challenges and opportunities individuals face in preparing for retirement.
Now, let's dissect the key concepts discussed in the article "Risks of early 401(k) withdrawals" by Aimee Picchi from MoneyWatch, dated April 18, 2023:
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Retirement Savings Disparities: The article highlights a concerning statistic that about 27% of people aged 59 or older have no retirement savings. This data is derived from a survey conducted by Credit Karma, a reputable financial services firm. Such a substantial percentage indicates a widespread issue, emphasizing the importance of addressing retirement planning disparities.
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Social Security Concerns: The article delves into the precarious situation of the Social Security program, projecting its trust fund depletion by 2033. This depletion could lead to a significant reduction in benefits, impacting the 67 million retirees dependent on the program. The potential 23% cut in benefits, as mentioned in the article, poses a serious threat, particularly to those with meager or no retirement savings.
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Changing Attitudes Toward Social Security: The piece references a study by Natixis Investment Managers, indicating a shift in attitudes among younger workers. Only about half of millennials believe that Social Security will play a substantial role in their retirement plans, contrasting with 9 in 10 baby boomers who rely on it more heavily. This shift suggests a growing awareness among younger generations about the need for alternative retirement planning strategies.
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Retirement Saving Discrepancies: The article exposes a significant gap between the retirement savings goals and the reality for baby boomers. While boomers express a need for $1.1 million for retirement, the median retirement savings for this generation is only $120,000. This disparity underscores the challenges individuals face in achieving their retirement goals and the importance of realistic financial planning.
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Impact on Retirement Age: The article explores how the gap between retirement savings goals and actual savings may be influencing the retirement age. Baby boomers, faced with the reality of inadequate savings, are adjusting their expectations and planning to work longer, with many projecting a retirement age of 70. This adjustment reflects the financial challenges and adaptations individuals make in response to their retirement savings realities.
In conclusion, the article provides a comprehensive overview of the risks associated with early 401(k) withdrawals, emphasizing the broader challenges within the retirement landscape, including disparities in savings, Social Security uncertainties, and the evolving attitudes of different generations toward retirement planning.
