Expert: 'It's dangerous' when Americans use 401(k)s as emergency funds

Dhara Singh
Reporter

Even in times of crisis, you shouldn’t use your retirement savings as an emergency fund, said Chris Hogan, author of the book, “Everyday Millionaires” in a conversation with Yahoo Finance. 

“I’m trying to caution people from using 401(k)s for emergency funds,” Hogan said. “I think it’s dangerous to steal from your future self to clean up your present mess.”

Hogan’s advice comes when nearly half of Americans have withdrawn from their retirement account or are contemplating the move because of the pandemic, according to a recent survey by personal finance site Magnify Money. The coronavirus relief legislation known as the CARES Act also relaxed rules related to withdrawing early from retirement funds.

“I find the government has made it easy, removing the 10% and income tax period,” Hogan said.

‘Undo many, many years of growth’

Instead, Hogan advised Americans to stay the course and avoid retirement withdrawals, because one withdrawal can lead to many others and diminish years of potential returns.

“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 few withdrawals to undo many, many years of growth,” Hogan said. “I want to caution people [to] go in with their eyes wide open.”

He alludes to how tough times may actually prompt people to look at their budgets closely and understand the risks further debt may bring. (Source: Getty Creative)

As jobless claims exceed 36 million, Hogan recommended that those short on cash to not shut out the possibility of looking for a job, even a part-time one. 

“I would much rather you take on a part-time job, sell some things, downgrade your lifestyle, as opposed to undoing 15 years of your investment and future,” Hogan said. 

‘We’re going to have a financial awakening’

Hogan remained optimistic about lessons Americans can learn during the coronavirus pandemic, such as becoming more intentional about their spending and saving habits.

“I think we’re going to have a financial awakening,” he said. “[People] are refocussed on what they’re doing and why it mattered to them.”

He alluded to how tough times may actually prompt people to look at their budgets closely and understand the risks more debt may bring. 

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He advised Americans to remain intentional about decisions regarding money, even if the markets rally and the housing market seems enticing again.

“When things are not [increasing], they drop,” Hogan said. “Be intentional about how we invest by keeping our hands on the pulse.”

Dhara is a reporter Yahoo Money and Cashay. Follow her on Twitter at @Dsinghx

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