What to do with your retirement plan and savings during COVID-19
Chris Hogan, Author of 'Everyday Millionaires', joined Yahoo Finance's Myles Udland, Melody Hahm, and Dan Roberts to discuss retirement planning amid the coronavirus pandemic.
Video Transcript
MYLES UDLAND: It's time now for Retirement Ready brought to you by Fidelity, and today we're joined by Chris Hogan, he is the author of the book "Everyday Millionaires," and Chris, I want to start with something that you highlighted. I saw a few other folks bringing around the data from this survey, which is that about half of Americans said that they already have or they plan to draw on their retirement accounts during this period to try and make ends meet, and I just want to start with your view on one, why that can be a bad thing, two, what sort of situation you think someone might have to be in to go that route, and what the risks are if it does come to pass that you draw on your retirement account for money you need right now.
CHRIS HOGAN: Yeah. Right now as we deal with this pandemic, you know, this is something like we've never seen before, and unfortunately when people find themselves in hard times, they seem to reach out and will look for money or help in any way they can. And unfortunately, what we've found is, a lot of people do not have an emergency fund. I've seen studies where it shows 80% of people are living paycheck to paycheck. So if that one check doesn't show up, they now have a situation. But on the flip side, we've also seen it where 61% of Americans say that the pandemic has made it hard for them to save for retirement, and so we kind of have both pools on both ends. I'm trying to caution people from using their 401(k)s as an emergency fund.
I think it's dangerous to reach into that and to pull money out. Even though through the CARES act, the government has made it a little bit easier, removing the 10% penalty. However, it didn't remove the income tax burden that has to be taken care of over a two year period. I just think it's dangerous to steal from their future self to clean up your present mess. I really do, and so I'm cautioning people to really slow down. Don't look at that as a first step to take. I honestly tell people the only time you want to touch a 401(k) or 403(b) is to stave off a bankruptcy or foreclosure. Other than that, you want to leave that money alone and let it grow.
DAN ROBERTS: Chris, Dan Roberts here. Thanks for joining us. Your advice is useful and helpful for young people right now, and there's a lot of people out there warning relatively young people what not to do in terms of their 401(k)s and in terms of retirement savings. What would you say to those older folks who actually might be closer to retirement? Especially because once this started happening and we saw the losses with the market, now stocks have bounced back a little bit, but some of those people, my parents included, have been very concerned about their savings and the money they have in the market.
CHRIS HOGAN: No, you're absolutely right. These are people that have worked for years to be able to get to this point to be able to start to enjoy life on their terms. And so for those people, I'm telling them that listen, my heart goes out to you, I know that you had a plan in your mind, that's what allowed you to work hard and stay focused, but it's now time to shift expectations. It's now time to regroup and look at this and say, what do we have to do moving forward? Are you going to have to work another year or two longer to be able to allow this market the chance to be able to rebound? All is not lost, but there's definitely an adjustment to the game plan, and I think the sooner that they look at this and they embrace it, and they sit down with their investment professional and talk about it, they can ultimately start to feel better about this adjustment.
MELODY HAHM: Chris, unfortunately though, you're speaking like a rational human in a rational time, and I think as you alluded to earlier, unfortunately this pandemic is very irrational, right? And people are facing a lot of not only financial anxiety, but mental anxiety and just confusion in general, and it doesn't help that probably a lot of their cohort, if they experience a lay off or a furlough, maybe their friends did, maybe their neighbors did as well, so it's not like they can tap into friends and family who are also probably suffering the same fate. What's kind of one piece of very tangible advice you can give for people who do choose to dip into their accounts now?
CHRIS HOGAN: Well, I think you have to go into it with your eyes wide open and understand what you're risking. You have to understand that this is money that you're going to have to try to replace, and you know, the compound interest and the compound growth that's there as well. So you need to be very aware and be very, very intentional. What scares me is that once people reach into their 401(k), the tendency is they go back to it two and three more times. And you and I both know it only takes several, a few withdrawals to undo many, many years of growth. So I just want to caution people to go in with your eyes wide open. I would much rather you take on a part time job. I would much rather you look for ways to sell some things, downgrade lifestyle as opposed to undoing 15 years of your investing and your focus for the future.
MELODY HAHM: I want to focus on perhaps an optimistic projection. Of course, your brand is about Everyday Millionaires, what kinds of Everyday Millionaires do you think will emerge out of this crisis?
CHRIS HOGAN: Oh, that's a fantastic question. I think we are going to have an awakening financially coming out of this. I think people are going to start to look, and I've had several people call in on my show, "The Chris Hogan Show," and they say, Chris, this is never again going to happen to me and my family. You know, they're almost like reawakening and getting more focus on what they're doing and why it matters to them. So I think we will have more people being intentional, seeing that the risk of debt, right now where people are having their hours cut. We've got 37 million Americans right now that are unemployed, but yet, they're getting phone calls from credit card companies or car loan companies. People are going to wake up, they're going to get more focus. I think they're going to start to invest, and we will see an uptick in Everyday Millionaires here over the next two to three years.
MYLES UDLAND: And Chris, just quickly, let's finish with this. I mean, I think we're talking about a more defensive behavior there, right? I mean, people worried about this happening. Next, I guess, you know, you've talked to a lot of people who since the crisis were concerned about getting back into the market, do you think there's going to be a big aversion to smaller leverage, buying homes, and investing in yourself now among people who are worried about the next pandemic, which God willing, this is the only time we'll have to take this tactic, but certainly it's something people are going to be worried about.
CHRIS HOGAN: Well, here's the good thing. Right now we're seeing mortgage rates hold very steady. The home buying market is still moving. People are buying and selling, which is a surprise to me. I would have thought that would have slowed down a lot more, but I do, I hope people are able to see this and really understand the stock markets are living and breathing thing. When things are optimistic, it's climbing, and people are excited. When things aren't going well, it drops. So I hope people are smart enough to understand the only way to grow money is to invest it. And so we've got to be intentional with how we're investing but keeping our hands on the pulse.
MYLES UDLAND: All right. Chris Hogan is the author of "Everyday Millionaires," thanks so much for joining us, and we'll talk to you soon.
CHRIS HOGAN: Thank you again.