What if you can't pay the rent, there's nothing in the refrigerator – and the only money you have is what's in your 401 (k) or IRA?
It's not a rhetorical question. Millions of Americans have been hit by the economic crash sparked by the pandemic. GDP collapsed in the second quarter at an unbelievable rate of 33%. Tens of millions of jobs have been lost. Up to 40 million Americans are at risk of eviction.
Almost 20% of households with children now state that they cannot afford to feed their children enough.
What to do? One option for people lucky enough to have a 401 (k) and / or an individual retirement (IRA) account might be to take advantage of them on a short-term basis, says Sally Brandon, senior vice president at Rebalance, Investment and Retirement Consulting firm.
In the old days – as it did before when the pandemic changed everything – financial advisors like Brandon pretty much agreed that you should only withdraw early from your 401 (k) or IRA account as a last resort. Not only were there severe penalties and taxes, but you'd waste time putting the money together.
But now Brandon admits that "your retirement savings may be the only lifeline you have" and that "some people may not have a choice – they may need to take money out right away".
Fortunately, the federal government has relaxed its strict rules for early withdrawals from retirement accounts. The Coronavirus Aid, Aid and Economic Security (CARES) Act was passed by Congress with overwhelming and bipartisan support and was signed into law by President Trump in March. Among other things, the 10% early withdrawal penalty is eliminated if you are younger than 59½ years. The money is treated as income, but you are allowed to spread the tax burden over 2020, 2021, and 2022 (the IRS also gives you the option to include the entire distribution for the year of distribution in your income).
If you really need to tap into your retirement accounts, Brandon offers some useful advice here. Don't take out large sums of money. "Just because you can doesn't mean you should," she says. "Consider taking out just a small piece at a time and invest as much as you can."
Read: I am a 57 year old registered nurse with no savings and I plan to retire in 7 years. What can I do?
Make sure you have strict priorities for anything you withdraw. If necessary, work with your mortgage company or landlord to make sure you can stay in your home. Here's some advice on key issues like Mortgage Forbearance and Tenant Protection.
Don't skimp on medical care for yourself or your children – staying as healthy as possible can prevent bigger and more costly problems. Here is some great advice on various medical topics from Johns Hopkins Medicine, one of the most renowned healthcare providers in the country.
Maintain your internet, utility, and phone accounts – vital lifelines – and again, don't be afraid to reach out to whoever provides these services to come up with more sensible payment plans if needed. Here are two important resources: the Federal Program to Support Low-Income Home Energy Supply and the Federal Program to Support the Lifeline for Affordable Communications.
After all, reliable transport remains a must. Make sure you get from A to B as efficiently as possible. Work with friends and neighbors to share resources and save money. For example, when you go to the drug store, can you pick up a prescription for someone? And vice versa. Being a good neighbor is always a good idea, especially at a time like this.
Read: This eye-opening experience makes me rethink how social security affects my retirement savings
It's also important to remember that fraud can multiply in difficult and uncertain times. Here are five things you can do to avoid falling victim to a coronavirus scam.
All of the above advice have one thing in common: stay calm and try not to get emotional about your situation. I can empathize with what you are going through, but it is more important than ever to think clearly. Nobody can say when this storm will pass, but it will pass.
Read: How Do You Know When You Are Old?
From a financial perspective, your goal should be to focus on the above priorities as we move through this short-term period – while keeping as much of your long-term financial plan intact as possible. Easier said than done, I know.
If you have any specific questions about your situation – anything related to the above – please let me know. I will try to answer some of your emails in a future column. My email: RetireBetterMarketWatch@gmail.com.