What do you do when you’re hit with an unexpected bill or job loss? How about when times are tough and you need extra cash? Maybe you decide it’s time to quit paying rent and buy a house. Are you tempted to withdraw money from your retirement savings? After all, it’s your money and it’s just sitting there.
Surveys say approximately 52% of Americans have taken an early withdrawal from their retirement funds for other reasons than retiring. The following graph highlights the most common reasons people tap into retirement savings.
As you can see, 48% have not withdrawn early.
An article on ProNvest says, “Older savers are less likely to withdraw money from their retirement fund than younger savers. Fifty-four percent of millennial savers (ages 22 to 37) advise they’ve taken an early withdrawal from a retirement savings account, compared with 50% of Gen Xers (ages 38 to 53) and 43% of baby boomers (ages 54 to 72).”
When times get tough, taking an early withdrawal from your retirement may seem like the answer to your troubles. The government has even made it easier for you by removing the 10 percent penalty on withdrawals up to $100,000.
But is it a good idea? Greg McBride, CFA, Bankrate chief financial analyst, says taking money out of your retirement savings should be your last option.
“Tapping into your retirement account should truly be an absolute last resort,” he says. “The $10,000 withdrawal you make today could cost you $57,000 in retirement savings 30 years from now – and that doesn’t even account for the tax hit you take on the money withdrawn this year.”
He suggests several other options before tapping into your retirement account. You can use whatever emergency money you have, aggressively cut your household expenses and arrange for forbearance or other payment relief on your mortgage and other loans.
A couple of other ideas to consider before taking money out of your retirement account include taking money from your home equity or personal line of credit. You could also borrow from family members or friends.
Choosing to do any of the above preserves your retirement account for its designed purpose. If you use the money now, you may assume you’ll have plenty of time and resources to replace those funds. It’s better to leave the retirement savings where it can continue to grow.
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