Credit, Coronavirus, And Your 401(k): How To Weather The Storm

As we all stare down the barrel of uncertain times in the world, it’s always interesting to see how governments, businesses and consumers react in a crisis. Consumers, ideally, get cautious during times of tumult, and today, 52% of American adults say they’ve intentionally reduced their spending due to the coronavirus pandemic, according to a new study from Bankrate. This is the best move households could make right now, since none of us really know what the future holds, or how many people may find themselves unemployed before this pandemic is over.

But the American economy is consumer-driven, and just because people don’t have an income coming in doesn’t mean they’re going to stop spending on necessities. Today, almost half of adults in the U.S. — 47%, or nearly 120 million — have credit card debt, and almost 50% have increased that debt as a direct result of COVID-19, many out of necessity, per a new study from CreditCards.com.

The Government's Top Priority

During times like these, and, frankly, at all times, the government's number one goal is to keep the economy afloat. American consumers are supposed to be the ultimate beneficiaries, but inevitably, the capitalistic distributors of these benefits are always American companies. Think about it this way — how many of those 120 million Americans saw their interest rates on their credit cards drop as the Fed rates plummeted to zero? A good bet is none.

The federal government is in a unique position in that it can print money without limitations, and no concern for the long-term impact on the economy. Inevitably, in times of economic crisis, it’s the consumers who live paycheck to paycheck who are the most affected. In March, nearly 40% of people in households earning less than $40,000 found themselves furloughed. Meanwhile, just 19% of individuals in households earning $40,000 to $100,000 were furloughed, and only 13% of people in households with an income above $100,000 found themselves unemployed, according to a Federal Reserve survey.

Unfortunately, many of those consumers are now getting a second kick in the head as it sinks in that banks and credit card companies can, with no reason, slash their credit, or even cancel their credit altogether. One out of every four credit cardholders have seen their credit slashed, for a total of nearly 50 million people, according to a study from Compare Cards. What does this mean? At a time when the government absolutely cannot function without credit, the consumer may very well have to.

So, what’s a consumer who’s short on cash to do?

Many of us may look to tap our 401(k)s, which, if done smartly, can be a solid option for those with no other means of weathering this storm. But, if done incorrectly, the actions consumers make today to get through these hard times can have lasting ramifications for the rest of their lives. The Baby Boomers and all other generations that will follow them into retirement have seen their company pensions replaced with 401(k) savings plans that shift investment risk and retirement security into the hands of the consumers. And the CARES Act, while many of its provisions are designed to help those struggling, may open up the leaky faucet even more. These three major retirement provisions of the act have the potential of leaving future retirees out in the cold:

The postponement of RMD's (required minimum distributions)

Increased limits of 401(k) loans from $50,000 to $100,000
Investors under 59 ½ can withdraw up to $100,000 from an IRA without the 10% penalty, with three years to either pay the taxes or put the money back.

Don't act on the CARES act before you understand this

Again, all of these provisions can provide unique planning opportunities if utilized correctly to improve one's financial position. But if many people dive into one of these options without a solid strategy, it may result in devastating consequences for a country that was already ill-prepared for retirement.

Just how ill-prepared? Half of American families aged 56 to 61 have less than $21,000 in retirement savings, according to a study from the Economic Policy Institute, and 40% of older Americans now rely solely on social security as their only source of income in retirement, according to a report from the National Institute on Retirement Security.

With 10,000 Americans now reaching the age of 65 daily (growing to 12,000 within the next 8 years, according to Deutsche Bank), it’s past time for Americans to understand that no corporation or government program is going to help those who do not help themselves first.

Yes, the CARES Act will absolutely help companies, Wall Street and the stock market, but from a consumer standpoint, it will only help those of us who are informed, and who are able to take a 360-degree view of our complete financial picture — including debt— before making any moves. Millions of consumers are hurting right now, and are unsure where to turn. My advice in both good times and bad is to turn to your team of trusted professionals, including your financial planner, who can walk you through your best moves during these next few years of uncertainty.