If you cashed out your retirement plan during COVID, here’s how to rebuild

During challenging financial times, people often turn to their retirement funds as a last resort to help with money strain. While this may be a quick fix, the long-term consequences can be harsh.

Nearly six out of 10 people withdrew money from their retirement during COVID, according to research from Kiplinger. Sixty-three percent of those who withdrew funds used the money to pay for day-to-day living expenses, and 41% used the money to pay for a medical expense.

“Many people really did not have much of a choice but to tap into their investments,” says Denny Artache, president and CEO of financial advisory Artache Financial. “People's livelihoods were eradicated. They couldn't work. They ran out of money because they didn't practice staying out of debt and having money earmarked for emergencies.”

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But using savings dedicated for retirement years before it’s needed comes with penalties and fees that can hinder those financial gains even more. Early withdrawals are charged a 10% penalty, and the money taken out will be taxed as income. A decision made in a moment of financial stress can take years to recoup, Artache says.

“It may take you three to four years to recuperate from taking what you took out in six to 12 months,” he says. “We don’t know what the market is going to do.”

Artache advises people to get back on track as soon as possible, and save whatever they can back into their retirement savings. Instead of feeling regret, feel a sense of motivation, he says.

“Don't shame yourself to death because you had to do what you had to do,” Artache says. “Get into the habit of putting whatever you can afford away every month and earmark money that you're not going to spend, so that when emergencies happen again, you're not tapping into your nest egg of retirement.”

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Having an emergency fund on top of retirement savings is a critical piece to safeguarding your savings. However, just 23% of people have six months of expenses saved for an emergency, while 25% have no extra savings at all, according to a 2021 survey by Bankrate.

If your situation is dire and you’re searching for extra cash, Artache says it’s better to reduce or stop your retirement contributions rather than liquidate the accounts. This way, you can more easily pick back up where you left off, and avoid disrupting the benefits of compound interest.

Employers can also play a role in preparing their employees for the ups and downs of their financial life. Providing benefits like a 401(k) or emergency savings offering, as well as financial literacy education, can help employees make a plan and stick with it.

Read more: 10 benefits and perks employees expect in a post-COVID world

“The way you help is you have people like me come in to talk to the employees and say things like, listen, I know you're hurting, I know you’re having a hard time, but let’s move forward,” Artache says. “Let’s make sure your actions and your discipline can offset the losses, and if you follow a plan, budget yourself, invest accordingly and let it run its course, you will be victorious.”

While these strategies take time and persistence, this foresight will eventually pay off.

“I've never met someone that put money away, had a great plan and said, ‘You know what? I'm sorry I did this,’” Artache says. “What they usually say is ‘I wish I would have done more.’ It doesn't happen overnight. It's a grind. But there's nothing worthwhile in life that happens quickly.”