When the economy suffers, people from all walks of life suffer as well. However, recent studies have shown that minorities were hit by the recession and it especially hurt their retirement plans the hardest. Taking an early withdrawal, a hardship withdrawal or cashing out on a retirement plan can be a costly move, but for some individuals it has become a necessity.
A new study conducted by the Ariel Education Initiative and Aon Hewitt revealed that Hispanic and African-American workers are going through their retirement accounts at alarming rates in comparison to Asian and White employees. The study, entitled 401(k)Plans in Living Color II, looked at the plans of sixty large United States Corporations representing more than two million employees. Their findings showed that the prolonged economic crisis is leading countless employees to look towards their retirement savings as a way to temporarily lighten financial pressures.
The study went on to further reveal out of the individuals who had company retirement plans and lost their employment in 2010, sixty three percent of African-Americans and fifty seven percent of Hispanics cashed out their retirement accounts completely. In contrast, only one-third of Asian-American and white employees who lost their job did the same.
Out of those who took hardship withdrawals in 2010, more than two-thirds reported they did so because of daily living expenses, unexpected emergencies and funds for debt. In breaking down the study, African-Americans ended up taking out hardship withdrawals by more than five percent of any other included ethnic group.
Retirement accounts, for the most part, are effective because they can grow quickly if they are left untouched. Taking a withdrawal against your retirement plan is not always the best move when you need debt help. Many retirement plans charge a penalty on top of the ten percent the government penalizes for early withdrawal or complete cash outs. Additionally, you will also be charged income tax against the money you withdraw.
There are some alternatives to cashing out your 401(k) retirement account such as taking a loan out against your balance and re-paying it through deductions on your wages. However, these types of loans are not without risk. The interest rates on this type of loan is competitive with other types of loans, but if you switch or lose your job while you still have a remaining balance due, you have sixty to ninety days to repay it in full or else it is considered an early withdrawal subjected to penalties and taxes.
Fifty percent of African-American and forty percent of Hispanic employees have outstanding balances owed on loans taken against their company retirement account, compared with almost twenty five percent of non-minority workers. The percentage of minority workers with retirement savings who owe an outstanding balance on their loans spiked between 2007 and 2010- reflecting the impact of the economic crisis.
According to a study performed by the Center for Retirement Research at Boston College, nearly fifty one percent of American workers are at risk for being unable to maintain their standard of living after they retire. The decision to take a hardship withdrawal or cashing out your retirement savings account should not be one that is lightly made. Not only will you lose a portion of your hard-earned money to penalties and taxes, but it also may force you to work longer than planned or threaten your financial security when you do retire.