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Americans raiding retirement funds early

Nearly one-fifth of full-time employed Americans have raided retirement accounts in the past year to cover emergencies, according to a national survey.

By MSN Money Partner Apr 25, 2011 12:48PM

This post comes from Sheyna Steiner at partner site Bankrate.

Bankrate on MSN MoneyDespite increasing signs of a stabilizing U.S. economy, 19 percent of Americans -- including 17 percent of full-time workers -- have been compelled to take money from their retirement savings in the last year to cover urgent financial needs, Bankrate's Financial Security Index found.


Though 80 percent of full-time workers didn't dip into retirement funds, far too many consumers are ill-prepared for emergencies, says Kim McGrigg, manager of community and media relations at Money Management International, a credit counseling agency.

"Perhaps the most alarming thing about these numbers is that they suggest a lack of other options," she says. "Consumers generally consider using retirement funds only as a last resort."


Michael Masiello, founder of the Masiello & Associates wealth management firm in Rochester, N.Y., agrees. "I believe that 17 percent of full-time workers taking early withdrawals is a higher-than-normal number, and it's certainly higher than it should be," he says.


The potential consequences of tapping retirement funds include early withdrawal fees, taxes and the loss of compound earnings -- not to mention the prospect of being unable to retire.


While workers might be able to replenish the funds pilfered from tax-advantaged accounts once they regain their financial footing, one of the main benefits of long-term savings is time and compound interest. An early withdrawal of $10,000 is not just $10,000. It's actually $10,000 plus whatever that money would have earned over the lifetime of the account. Furthermore, with penalties and taxes an early $10,000 withdrawal may only yield $6,500 if you're in a 25 percent tax bracket. Post continues after video.

Compounding gains turns money into a snowball, gaining size as it rolls forward. Without the advantages of compounding, workers who take an early withdrawal will later need to sock away more savings than they otherwise would have in order to fund retirement.


While it's fortunate that people do have the retirement savings to fall back on when they absolutely have no alternatives, they may be just delaying the day when they truly have no more resources and working is no longer be an option.

"That's the scary thing. People are turning to this as a last resort; they have exhausted their other resources. At that point there is very little in the way of alternatives," says Greg McBride, CFA, senior financial analyst at


In the years leading up to the recession, the easy availability of credit and plentiful home equity meant consumers could coast through emergencies with little money saved for a rainy day. But the Great Recession reaffirmed forgotten lessons from the Great Depression. Namely, saving money, minimizing debt and forgoing borrowing are the best insulation from financial adversity.


The survey suggests Americans increasingly feel their emergency preparedness is not what it should be. This month's Financial Security Index plunged to 93.5 from 97 in March.


"Despite data showing job creation, greater savings, lower debt burden, and rebounding household net worth, the new low in the FSI shows that people aren't feeling it," says McBride.

"Consumers are pessimistic on all five components of financial security. When you look at gasoline prices closing in on $4 a gallon and other events taking place around the globe, it can be unsettling."


More on MSN Money:

Apr 25, 2011 4:35PM
I know people dipping into their retirement funds for wants, not needs. Most people I know when times were good, didn't bother to put away money into savings because they probably thought the good times were gonna roll forever. Even people I know who got tax returns have spent it on crap instead of thinking "I better put this away, financial hardships will always pop up". Then they cry poor when the  unexpected expense does pop up. People just don't seem to learn.
Apr 25, 2011 4:23PM
Hanks... nope.  SS is based on wages so the older worker is probably paying more into SS than that cherished youngster you write about.
Apr 25, 2011 4:22PM
American's aren't feeling it because inflation is out of control, the government keeps printing money like it's going out of style, the interest rate stays at nothing making no foreign country interested in investing in our currency and 1.2 million homes are in foreclosure (or soon will be) so we know it's not over yet.  Add to all of that cheery news that Congress and the President refuse to make any real cuts to the budget and it becomes very difficult to stay perky.
Apr 26, 2011 8:37PM
Hanks..."AND PLANNING TO REMAIN EMPLOYED FILLING JOBS" is what you wrote in your first post.  I guess your reading comprehension skills don't even include your own posts.  Good one dude and don't call anyone names when your post has no sentence structure and horrible grammar.  You screwed up, I read what it said not what you intended to say.  Message boards are funny like that.
Apr 26, 2011 11:05AM

Bereasonable42..........I stand corrected.............older people that are .............RETIRED (UNEMPLOYED BY VIRTUE OF RETIREMENT) ..............DO .....PAY........A MUCH HIGHER % OF THE SOCIAL SECURITY THAN THE YOUNGER EMPLOYEES THAT ..............DO HAVE JOBS, AND PAYROLL CHECKS!.................BRAINDEAD DUFFUS!


Evidently you are retired from reading comprehension!

Apr 25, 2011 4:19PM
Americans raiding retirement funds early



This is how badly our overpaid, overperked and far over pensioned representatives did their jobs of representing!

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