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You deserve to have financial security in retirement. To make that happen for yourself, you’re going to need an investment account that produces a good amount of income to add to your monthly Social Security checks.
Unfortunately, over one-third of workers with retirement savings have made a dangerous choice that could jeopardize their ability to build the portfolio they need. Here’s what these workers have done.
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Millions of workers have made a dangerous mistake with their retirement savings
According to the Transamerica Center for Retirement Studies, 35% of all workers have taken a loan from a retirement plan or have taken an early withdrawal. Unfortunately, doing either can be a huge mistake — although early withdrawals are worse.
Taking money out of a retirement account before age 59 1/2 can trigger a 10% penalty in almost all cases, unless you fall within a limited hardship exemption. That’s a lot of cash to give away after working hard to save and to invest it for your future.
Once that money has been taken out, you not only lose that penalty, but you will also miss out on the potential returns those funds could have earned over time. A $10,000 withdrawal taken 20 years before your retirement date could ultimately leave your account $67,275 lighter than if you had left the money alone to compound (assuming a 10% average rate of return). Your balance falls so dramatically because you don’t just lose the money that you withdrew — you also lose all the potential gains that money could have made over the years.
Now, a loan is theoretically better than a withdrawal, but there are some issues with that as well. Most notably, if you don’t pay it back on schedule, it could end up turning into a withdrawal. The money also won’t be earning returns for you during the time it’s taken out. You do pay yourself back with interest, but the rate is generally much lower than the ROI you could have if the money is left in your account. Also, if you have bad timing and borrow during a market downturn, you could end up selling investments at a low price, which would result in missing the rally and having to buy back in once the cost has gone much higher.
What can you do instead of raiding your retirement accounts?
As you can see, taking money out of your retirement accounts is not ideal and can have serious long-term financial consequences. You don’t want to do it if you can find any other option.
The best solution would be saving up an emergency fund to cover unexpected costs without having to dip into retirement savings. But if you’re facing financial hardship without emergency savings, you may want to look into a 0% APR credit card offer or an affordable personal loan rather than putting your retirement security at risk.
While these options have downsides too, including the possibility of paying a high interest rate if you can’t repay your balance before the 0% promotional rate ends, at least you won’t risk a 10% penalty and the loss of decades of returns your money could have been earning.
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