Borrowing from the future
Updated: Mar 7, 2021
The pandemic crisis forces many Guamanians to touch their retirement savings but some use their withdrawals for whimsical purchases
About 2 million Americans have been tapping into their retirement accounts to cover daily living expenses since the Covid-19 pandemic hit last year, according to Personal Capital, a digital wealth management company. The global public health crisis has caused mass furloughs and unemployment that forced many to resort to their IRA and 401(K).
Guam sees this trend as well. David John, president of ASC Trust, said many families had “little to no other choices but to take money from their retirement plan.”
He said withdrawals in 2020 were up 50 percent from 2019. However, John said some may have made bad decisions. “The group that concerned me was those who tapped into their accounts to spend on non-essentials like cars and television sets,” John said.
“I heard from an auto dealer friend of mine that they (as well as other dealerships) saw record sales during Covid and they credited many sales to 401k distributions. If you took a distribution to buy a car or non-essentials, you need to focus on your future and start to save again."
John acknowledged that Guam families that were compelled to touch their retirement savings are facing a difficult road ahead to get back on track. They will have to work hard to catch up and not short their retirement.
“However, I would like you to think of it in another light,” he said. “If you had not been saving and did not have an account to tap into, where would your family be now? Hang in there and resume saving (perhaps at a bit higher rate), when you are able to work again. You will get through this. Have faith.”
Nevertheless, John said the decline in contributions — 7.5 percent year over year— was “not as bad as I was anticipating.”
In general, he said, the pandemic did not have any major effects on retirement investments.
“Participants in retirement plans that kept their jobs and were able to continue to contribute to their retirement had a great year as the S&P 500 Index finished 2020 up over 18 percent,” said John. “Participants that were not able to contribute due to being laid off or had hours cut, but did not take a distribution, came out OK, again due to the stock market’s strong performance.”
John mentioned regional retirement balances grow in the year by approximately 12.5 percent, with average balances increasing 7 percent from $28,000 to $30,000. “If this was all the data one looked at, you would think what Covid? However, the further you drill down in the numbers you see the real story,” he said.
John is optimistic that 2021 may bring the economy back to a certain extent. “My prediction for 2021 is twofold,” he said. “I see the first half of the year being difficult for many businesses, which will result in less hours and more layoffs— or at least less rehiring— as many parts of the economy remain closed. However, as the vaccine numbers increase and herd immunity nears, I anticipate the economy will begin to meaningfully reopen in the second quarter.”
He is hopeful that tourism will reopen soon so that can return to work. “As travel is deemed safe, I believe arrivals to Guam will spike early on as pent-up demand for entertainment and travel is more pronounced than what is being predicted,” John said. “This is especially true for travel to Guam due to our market’s proximity of three to four hours from our target markets, travelling to Guam does not require transiting through multiple airports and we are a U.S. territory with high vaccination rates.”
Once travelling is deemed safe and quarantine restrictions are lifted, Guam’s tourism industry is likely to get a substantial bounce, John said. “This bounce, coupled with the buildup and access to H2B workers for civilian and local government projects bode well for the second half of the year, more precisely the fourth quarter. With this, I believe that there is light at the end of the tunnel. My concern is that many businesses might not be able to hang on that long.”
To those who are worried about their retirement, John said, “This will pass.”
He recalled seeing a major economic crisis when he started his career as an intern in the fall of 1987. “My first month on the job, we saw the ‘Black Monday’ event which saw the stock market drop 20 percent in one day. Imagine waking up to find out your retirement account was down 20 percent from when you went to sleep?” he said.
The world has since seen a series of disasters: the 1997 Asian financial crisis, the dotcom bubble, the 9-11 terrorist attacks, the 2007-2008 global financial meltdown, and now Covid. John noted that each event was caused by different macroeconomic events and each had different levels of drops and lasted different amounts of time.
“However, one thing is common, for those that stayed the course, kept making retirement contributions and did not panic, all returned to normal within a few quarters. This too will pass,” John said. “The key is to stay on your plan, do not take a distribution if you can help it and continue to contribute. If you can do this, you will be fine.”
Those who needed to take a distribution are advised to get back on their horses and start saving again “as soon as you can.”