For any emergency supplies — from first aid kits to spare batteries — it is better to have it and not need it than to need it and not have it. The same logic applies to emergency savings, which can be a lifeline when unexpected expenses arise. Without that savings safety net, medical emergencies, urgent car or home repairs and even sudden unemployment can wreak havoc on one’s finances, forcing them to turn to high-interest debt or depleting retirement savings to make ends meet.
The Retirement Plan Consulting group at Arvest Wealth Management is dedicated to helping both employers and employees make the most out of their retirement plans. That includes providing resources to help individuals make informed decisions when it comes to those unexpected situations that might affect their long-term retirement goals. Even in cases where it might make sense to withdraw from a retirement account early, the Retirement Plan Consulting group wants to make sure individuals have access to the expertise they need to consider options less likely to derail their future plans.
Emergency Savings Basics
Adequate emergency savings will look different from household to household, but the general recommendation is to keep three to six months’ worth of living expenses. Additional financial obligations, dependents and other unique circumstances might affect the actual amount of savings one needs to be covered in an emergency.
For those with little or no savings, the thought of building up that much in reserves can feel daunting. However, sound financial practices apply to one’s emergency stash just as they would any other savings account: Start out by setting a goal amount and timeline for building funds. Create a budget to determine how much can be dedicated to savings from each paycheck. Aim to remove barriers to saving by setting up automatic transfers and gradually increasing the amount transferred until the goal is reached.
With a target in mind, the next obvious question is, where is the best place to keep one’s savings? The benefits of compound interest can be especially useful for building up an emergency fund, but one should also keep those savings in an account that is easily accessible if and when the need to withdraw arises. A high-yield savings account can be a good choice because it provides better returns than a regular savings account. Individuals who are fairly confident in not needing their funds immediately might place a portion of their savings in a certificate of deposit, or CD. Do so with caution: CDs offer appealing rates, but they are also less flexible and may have penalties for early withdrawals.
Hardship Withdrawals
Retirement accounts are meant for long-term savings and have tax advantages for retirement. Using them for emergencies can result in penalties and taxes and may also hinder one’s long-term financial goals. There are alternatives, such as drawing from emergency savings, taking a personal loan or using a home equity line of credit. Any of these options have the benefit of preserving one’s retirement savings and allowing the funds to maintain their growth potential — not to mention avoiding those early withdrawal penalties.
Still, there are times when tapping into a retirement account is the best way forward. Hardship withdrawals allow individuals to take money out of their retirement account before retirement age in the case of an immediate and heavy financial need. The most common circumstances that meet the definition of a hardship withdrawal include medical expenses, preventing eviction or foreclosure on one’s primary residence, tuition, burial or funeral expenses and even repairs to one’s primary residence, depending on the situation. Costs associated with adoption and escape from domestic violence have also recently been added to the list of covered circumstances.
In addition to expanding the list of acceptable withdrawal reasons, recent legislation has led to a shift in protocols around who is responsible for documenting the withdrawal and need. Prior to the 2022 SECURE Act 2.0, the industry standard was for a plan administrator to approve or deny the participant’s hardship withdrawal based on their plan rules. Plans are increasingly adopting a self-certification protocol instead, where the participant is responsible for their own documentation.
While it might be necessary to draw from one’s retirement savings, there are short-term as well as long-term downsides. The withdrawn amount is subject to income taxes and, depending on the circumstances, additional penalties. In the long run, the withdrawal can have deleterious effects on one’s long-term financial security and investment growth. However, there are ways to mitigate the damage once one’s financial situation stabilizes, such as increasing retirement contributions, taking advantage of employer matching, and reviewing and adjusting one’s investment strategy to maximize growth potential.
Considerations for Employers
Given the potential consequences, it is paramount for plan sponsors to clearly and effectively communicate the rules and drawbacks of hardship withdrawals to participants. The Retirement Plan Consulting group often spearheads these efforts for plan sponsors by having individual conversations as well as offering financial education to participants. Having resources for budgeting and financial planning on the front end may, in some cases, help individuals avoid the circumstances that would necessitate a hardship withdrawal in the first place.
Plan sponsors have an important role to play in fostering a culture of financial literacy within their organizations, in addition to regularly reviewing and updating plan documents to comply with the latest regulations. The Retirement Plan Consulting team also tries to be an active partner to plan sponsors, working with them to promote financial wellness programs that include budgeting, saving and investment education. Together, the Retirement Plan Consulting team and plan sponsors can create an environment where participants feel empowered to make sound financial decisions that support their long-term success, even through life’s uncertainties.
Learn more about Arvest Wealth Management online or by calling (833) 363-1202.
Trust services are provided by Arvest Bank. Investment products and services are provided by Arvest Investments, Inc., which does business as Arvest Wealth Management, a member of FINRA/SIPC, an SEC-registered investment adviser and a subsidiary of Arvest Bank.
Arvest and its associates do not provide tax or legal advice.
Investments and Insurance Products: Not a Deposit | Not Guaranteed by the Bank or its Affiliates | Not FDIC Insured | Not Insured by Any Federal Government Agency | May Go Down in Value
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