If you’ve been thinking about raiding your retirement savings to finance an adventure, pay for a luxury item you’ve been wanting, or to be able to fund your life while you make a career change, you’re not alone.
When you have an account that you’ve been contributing to for years which now has a sizeable amount of money, it can be tempting to cash in these funds.
While it may seem like a good idea in the moment, to access relatively “easy cash” there are quite a few negative implications:
- When you take money out of your retirement fund, first of all you have to pay tax on that money, as it is considered income. The amount of tax you pay will depend on your income level and tax bracket at the time of withdrawal. So if you have $20,000 in your retirement account and you’re thinking that those funds would be ideal for a renovation or for taking a few months off work, after tax and penalty fees you may end up with only $10,000 cash in your pocket.
- You may also have to pay a penalty fee for taking money out of your retirement early. It depends on where your funds are invested and the stipulations of the investment and account
- You also need to consider not only how long it took for you to save that money, (by making small contributions to your retirement account,) but by how much that money could have grown or increased if you hadn’t taken it out of your retirement account. Let’s assume that you took $20,000 out at age 30. If you are planning to retire at age 65, and left the money to accumulate in the retirement fund, the money would have had 35 years to grow. So if the $20,000 could be invested with a 5% return for 35 years, by the time you retire that money would have grown to over $110,000 with compounding interest!!! WOW!If you are very conservative and only earn 3% for the next 35 years you will still grow that $20,000 to over $56,000 – that’s still a lot of money!
Inside your retirement account your investments have the benefit of compounding interest AND you don’t have to pay tax.
That’s why I recommend that you not raid your retirement fund and instead, put money aside and SAVE for your big adventures or other extravagances.