Is it ever a good idea to dip into your 401(k) early?
How to make ends meet during tough times
MADISON, Wis.– There are plenty of reasons to avoid taking money out of your retirement savings before you retire. But for some people, who’ve been out of work for nearly two months, that might feel like the only option. However, financial experts warn that is almost never a good idea.
A new report from Vanguard shows that if you withdraw $10,000 today from your 401(k), you’re stealing from what could become more than $57,000 in 30 years. Even though the government has temporarily suspended the 10% penalty usually imposed on early withdrawals during the pandemic, financial advisers warn: do not touch your money.
Retirement accounts depend on compound interest to grow, which means the longer you leave your money alone, the better. Taking money out of your account now could hurt the balance you’ll have saved when you retire, even if you replace it later. Advisors stress the importance of considering all your other options first, like personal loans, credit cards, and home equity loans.
Also, consider your ability to repay the loan quickly, and how possible it would be to add more to your retirement account to make up for losses.
If you are in a really tough spot financially, there are five questions you should be able to answer before withdrawing from your retirement savings:
- Do you really need it? And do you need it now? Ask yourself if the expenses you’ll cover with the money are both immediate and essential.
- Do you have any other money to use first? Lots of people have emergency savings or ‘rainy day’ funds. For many people, this is that emergency. Use those savings.
- Can you stop any automatic contributions to your savings accounts? Yes, you heard that right: stop saving. Right now, it’s more important to put food on your table than contribute to your retirement account. You can always catch up with your savings later.
- Can you refinance your home? If you’re a homeowner, reach out to a financial adviser and ask if you can refinance. Consider applying now while rates are low.
- Can you renegotiate your rent? Reach out to your landlord and ask if you can renegotiate your rent. Offer something that will sweeten the deal, like signing a longer lease or giving up the parking space that comes with your unit.
The bottom line: don’t withdraw money from your 401(k) unless you absolutely have to.
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