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Withdrawing money from your retirement fund ahead of time could

cost you more than you think

 

Nobody has all the right answers when it comes to saving for retirement, and everyone is bound to make money mistakes now and then.

However, some blunders are more subtle than others – and potentially more costly. Those types of mistakes can be especially dangerous because, by the time you realize you’ve made a mistake, it may have already cost you hundreds or even thousands of dollars. And there’s one common saving error that can be more expensive than you may think.

A dangerous misstep

One of the most costly retirement mistakes you can make is to withdraw money from your retirement fund before you retire. On the surface, that may not seem like such a disastrous move, but over time, it could potentially cost you tens or even hundreds of thousands of dollars.

Many people tap their retirement accounts when they’re faced with an unexpected cost or emergency. When millions of Americans lost their jobs due to the COVID-19 pandemic, for example, some of those affected took hardship withdrawals from their retirement funds.

In April, the average retirement account withdrawal was around $5,500, according to research from Fidelity Investments. A one-time distribution might not seem like it would have a significant effect on your long-term savings, but it could do more harm than you think.

The average retirement account balance among Fidelity investors is approximately $102,000, according to Fidelity Investments. Say you’re 40 years old with an account balance of $102,000, and you withdrew $5,500. If you were earning an 8% annual rate of return on your investments and you didn’t make any additional contributions, here’s what your total savings would look like at various ages, depending on whether you had or had not taken that withdrawal:

Age Total Savings Without
$5,500 Withdrawal
Total Savings After
$5,500 Withdrawal

40 (Today)

$102,000

$96,500

50

$220,200

$208,300

60

$475,400

$449,800

70

$1,026,400

$971,000

In this case, that single $5,500 withdrawal can amount to around $55,400 in lost potential savings after 30 years. And if you were to make multiple withdrawals over the years, you could miss out on even more.

How to avoid tapping your retirement savings

When you’re faced with an emergency expense and have no way to pay for it, raiding your retirement fund may be your only option. However, it’s important to prepare for these unexpected costs before they actually happen so you can avoid this scenario.

If you don’t already have an emergency fund, now’s a fantastic time to start building one. Try to save enough to be able to cover three to six months’ worth of living expenses, but saving anything at all is better than nothing.

The more savings you have stashed in an emergency fund, the less likely it is you’ll need to tap your retirement account when you inevitably face an unexpected expense. And the longer you’re able to let your retirement savings grow, the healthier your nest egg will be.

To read the full article, click here.