Using Retirement Savings to Battle Life’s Struggles

Did you know that a health crisis, job loss, or other major life-changing events affect over 90% of Americans during their working years? According to a 2022 report from the National Endowment for Financial Education (NEFE), these financial disruptions often lead individuals to dip into retirement savings, resulting in significantly lower balances when they reach retirement age.¹

The NEFE report, “Untangling the Determinants of Retirement Savings Balances,” notes that life-changing events such as unemployment, divorce, or serious illness happen an average of four times before age 70, reducing individuals’ ability to save consistently for retirement. As a result, many Americans—regardless of income level—end up with retirement savings that are only a fraction of what is needed to maintain their lifestyle.¹

Effects on Retirement Funds

While retirement accounts are designed for long-term savings, people may use them as a lifeline during periods of financial distress. This decision often comes with early withdrawal penalties and taxes, not to mention the lost investment growth that compounds over time. Even modest withdrawals can have a substantial long-term effect on retirement outcomes.

Income Disruptions Are Common

The NEFE study examined two major types of income loss:

• Workers losing all income for a year 
• Workers with a 10% or greater earnings drop lasting one year 

Among working men aged 25–70, 61% have lost all earnings for at least one full year, and one in four men aged 66–70 have experienced such disruptions four or more times.¹

The Financial Toll of Economic Shocks

The NEFE research placed a dollar value on common financial shocks:

• Earnings Drops: A 10%+ annual earnings decline led to an average of $2,700 to $6,200 less in retirement savings, depending on the worker’s age. Those who faced a drop in earnings four or more times lost up to $10,000 in retirement savings.¹ 
• Health Declines: Experiencing serious health deterioration resulted in a loss of up to $86,000 in retirement savings.¹ 
• Debt Increases: Every $10,000 increase in personal debt correlated with approximately $2,500 less in retirement savings.¹ 

Planning Ahead: How You Can Protect Your Future

The silver lining? While life is unpredictable, certain strategies can reduce long-term financial harm:

• Contribute regularly to an employer-sponsored retirement plan or a Traditional or Roth IRA. 
• Take full advantage of employer matching contributions, if available. 
• Build an emergency fund to help cover short-term crises without tapping into retirement funds. 
• Avoid early withdrawals or loans from retirement accounts unless no other option exists. 

Get Expert Help

Life’s financial struggles can be difficult—but you don’t have to navigate them alone. Whether you’ve already used some of your retirement savings and are trying to rebuild, or you want to protect your nest egg from future setbacks, a Money Coach can help you:

• Prioritize your financial goals 
• Develop a recovery or protection plan 
• Explore options for budgeting and saving 

Call 888-724-2326 to speak with a Money Coach and prepare your finances for whatever life throws your way.

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¹ “Untangling the Determinants of Retirement Savings Balances.” National Endowment for Financial Education. Updated 2022. https://www.nefe.org/_images/research/Untangling-Determinants-of-Retirement-Savings-Balances/Why-Retirement-Savings-Fall-Short-Executive-Summary.pdf

Employer matching contributions may be subject to a vesting schedule. See your Plan Document or speak with your Plan Administrator for details.

Early withdrawals from retirement accounts may be subject to income tax and an additional 10% IRS penalty. See IRS Publication 590-B or https://www.irs.gov/retirement-plans for more information.

Information provided in this article is for informational purposes only and is not intended to offer specific personalized investment, financial planning, tax, legal, or accounting advice.  We recommend that you consult an attorney, tax advisor, or accountant regarding your unique circumstances.