Last week I provided a concise breakdown of the major changes to retirement account regulations brought about by the passage of the SECURE act of 2022. For more information about this new law check out my article on the topic that ran on 1/11. Today however, I wish to comment on why I have grave concerns about parts of this legislation, and the potential impact it could have on those saving for retirement.
One provision in particular that concerns me about this new law is related to the removal of penalties for early withdrawals of funds from qualified retirement accounts for certain emergencies. While I do acknowledge the motivations behind these penalty free withdrawals is compassion and empathy for those struggling through tough times, the message it sends about the purpose of a retirement account is not a good one.
As an advisor, one of the primary tasks, we are given is to ensure that individuals accumulate enough in their working years to last them through the rest of their life. Part of the way in which we do this is by encouraging saving and making clear that funds invested for retirement need to stay in those accounts. The time value of money, and the laws of compound growth are essential to a person’s success in retirement. That is why we as a nation, give tax advantages to those who contribute to retirement accounts and penalize those who withdrawal from them early.
With this law however, a subtle but clear message is being sent to individuals that it is ok to take money out of your retirement account for things other than retirement if you need to. With so many Americans living paycheck to paycheck (63% according to a November report from LendingClub) It is understandable why legislators are looking for ways to soften the financial impact unforeseen expenses have on people. While this strategy might have some short-term benefits, it only makes a bad financial situation worse for the individual long-term.
This law change is, in my opinion, just an outward manifestation of the financial preparedness crises that we are in the middle of. If the economy continues to slow as it is likely to do, unemployment is likely rise, causing wages to fall. If all that happens more and more people will have difficulty even being able to stay current on their expenses. By passing these regulatory allowances, I believe the government is attempting to proactively reduce the amount they will be expected to pay in additional entitlements to those struggling.
What has sadly happened in this nation is the basics principals of personal finance have been neglected for so long that I’m afraid we don’t even know what they are anymore. Simple truths like you need have money available for a rainy day, or you need to wait until you have the money saved before making a purchase are foreign concepts to too many Americans.
I used to believe it was primarily the poor who lacked the financial knowledge or discipline required to avoid economic ruin. That is simply not the case today. According to the same November study I quoted, earlier 47% of high-income earners are also living month-to-month and would be just as likely to become insolvent if their income was reduced.