Lawmakers were generous with stimulus aid in 2021, and that helped many Americans cope with the pandemic and subsequent economic crisis. But a troubling thing happened as a result.
Consumers suddenly found themselves flush with cash at a time when supply chains were slowing down. That created a massive disconnect between supply and demand — and it drove living costs upward.
But while inflation began to creep upward in 2021, it downright soared in 2022, causing a financial strain for working Americans and seniors on Social Security alike. And many people had to make adjustments to their spending and financial habits to cope with inflation.
For some, that meant cutting expenses. For others, it meant hitting pause on retirement plan contributions. But for 32% of savers, it meant having to take a withdrawal from an IRA or 401(k) plan, according to a recent survey by U.S. News & World Report.
If that's a route you had to take, it's understandable. But if your financial circumstances change for the better in 2023, then it's best that you do what you can to ramp back up on IRA or 401(k) contributions — and bring your savings balance back up.
An early withdrawal may be more harmful than you think
Some people don't realize that taking an early retirement plan withdrawal doesn't just mean retiring with that much less money. It also means losing out on gains.
Say you took $5,000 out of your retirement savings last year because you needed the money to pay essential bills. You might think, “Well, I guess I'll just have to retire on $5,000 less.”
But what if you're 35 years old and your IRA or 401(k) plan normally generates an average annual 6% return, which is actually a fairly conservative one? If you're not going to retire for another 30 years, it means you're not just looking at a $5,000 loss in retirement income. Rather, you're looking at retiring with around $29,000 less when you factor in lost growth. For all you know, that'll end up being six months of retirement expenses.
That's why taking an early withdrawal from a retirement plan is generally not advisable — that, and the fact that you'll usually face a 10% penalty for removing funds prematurely. Now if you've already gone the early withdrawal route in 2022, well, you can't go back and change the past. But what you can do is to pledge to contribute more to your savings this year to compensate.
To do so, you might need to cut spending or pick up a second job. But you'll be thankful for having made those sacrifices later in life.
Incidentally, the pace of inflation has been slowing since peaking in mid-2022. So consumers across the board may get relief in that regard.
But even so, it still pays to do what you can to ramp up on savings if you tapped your IRA or 401(k) in 2022. You may have had no choice but to take an early withdrawal, but you shouldn't have to suffer later in life because of it.
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