- When you borrow from your retirement account, you're taking away the potential for that money to keep growing over time.
- "Investing isn't a sprint, it's a marathon," says Brian Stivers, investment advisor and founder of Stivers Financial Services.
- If you withdraw funds from a 401(k) before the age of 59½, the withdrawal will be subject to a 10% penalty by the IRS.
Inflation is still at a 40 year high. U.S. households are spending $341 per month more than a year ago, according to an analysis by Moody's Analytics.
To stay afloat, some Americans may be considering pulling money from retirement accounts early. Since 2020, more than 51% of Americans took an early withdrawal from a 401(k) or IRA, according to Bankrate, which surveyed 2,225 Americans last October.
Before you tap your retirement savings, there are some factors to consider, says Brian Stivers, investment advisor and founder of Stivers Financial Services in Knoxville, Tennessee. "As stocks remain volatile, pulling from a 401(k) today may hurt your finances even more."
Here are four reasons why an early withdrawal from a retirement account could be especially detrimental now, according to Stivers.
When you pull from your retirement account, you're taking away the potential for that money to keep growing over time. When stocks are choppy, the damage could be even worse, says Stivers. "If funds are withdrawn from a 401(k) in a down market at a loss and either deposited into a bank or spent, it's virtually impossible to make up the loss."
Trying to time the market can cost you thousands of dollars. From the beginning of 2001 through the end of 2020, the S&P 500 returned an annualized 7.5%. Had you invested $10,000 at the beginning of the period and stayed invested for the duration, you'd have ended up with $42,000 at the beginning of 2021.
However, if over that time period you missed the 10 best days for the stock market, you'd have less than half that — just over $19,000, according to data from J.P. Morgan Asset Management.
Invest as much as you can toward your retirement as early as you can, experts suggest, even if that's just a little bit of cash each paycheck. That's because the earlier you invest, the more time, as well as compounding returns, can help your money multiply.
"Withdrawing from a 401(k) early means less savings in retirement," says Stivers. "For example, a 30-year-old who withdraws $10,000 from a 401(k) averaging 6% would have almost $77,000 less in retirement."
Over time, investing in equities is generally a good way to outrun inflation. For example, the average annual return of the S&P 500 Index is about 10%, while the annual rate of inflation reached 8.3% in April.
Use Grow's retirement calculator to figure out how much money you need to retire.
If you withdraw funds from a tax-advantaged retirement account, like a 401(k) before the age of 59½, the withdrawal will be subject to a 10% penalty by the IRS.
In addition, all funds withdrawn count as taxable income when you file your taxes. The amount you pay depends on your tax bracket, and a substantial withdrawal "could put you in an overall higher tax bracket," says Stivers.
One of the best ways to consistently save and invest is to automate the savings and investment habit. To do that, you "have a certain percentage automatically withdrawn from your bank account and immediately invested, either in an investment account or in a retirement account, if your employer offers you a retirement plan," Tom Corley, author of "Rich Habits, Poor Habits," told Grow.
"Pulling early from a 401(k) creates a bad habit of only focusing on the short term and not the long term," says Stivers. When it comes to saving money for your future, it's important to remember, "investing isn't a sprint, it's a marathon."
Hypothetical discussions were for illustrative purposes only. The information is not intended to predict the investment performance of any security or index. Please consult a tax advisor or www.irs.gov when making any decisions regarding your IRA account.
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