Feeling a little guilty about how much you’ve saved (or haven’t saved) for retirement? Maybe you’ve actually withdrawn money from your retirement accounts well before your golden years. Well, you’re far from the only one who’s made this move.
According to a new survey from Bankrate, 49% of people with retirement accounts have withdrawn money before retirement age. The most common reasons for doing so were unemployment, medical bills or other unplanned expenses, or to repay debt.
More than half of the 2,697 respondents admitted they’re behind on their retirement savings.
An early withdraw can have a long-term impact on your financial stability in retirement. Up front, you’ll pay taxes and a 10% early withdrawal fee (unless you’re taking money from a Roth IRA for an eligible cause). That means you’ll have less cash in hand to use on your immediate needs versus the value you’d have in your account. And then, you have to catch back up.
Accelerating your rate of saving after taking an early retirement account withdrawal can be stressful, because you can’t rewind the clock to a time when you were younger—you’ve got to make the most of the time you have left before you can start taking distributions from your accounts.
Bankrate recommends replenishing your retirement savings by maxing out your 401(k)—especially if you have a company match available—and supplementing that savings with an IRA. You should aim to save 10 to 15% of your income for retirement, advised Greg McBride, chief financial analyst at Bankrate.
But what if you took money from your retirement account because you faced serious financial instability, like unemployment or the medical bills the survey respondents cited? You may not be able to bounce back and immediately start putting 15% of your income toward your retirement savings.
McBride said to remember that this type of saving is a long game. “An adequate retirement nest egg is borne out of decades of disciplined savings,” he said. If you can prioritize saving for emergencies as you resume saving for retirement, you’ll reduce the risk that you’ll need to dip into that retirement account again. The key is to restart your savings plan as soon as you can. “The longer you wait to start or ramp up, the deeper the future hole you’re digging,” he said.
McBride warned against resuming your savings too gradually after a withdrawal. “You can’t dabble at this, saving 3% or 5%, or continually put it off and hope to accumulate what you need.” If you’ve taken from your nest egg, make a plan to ramp up your saving plan again as soon as you can.
