Long Term Loss

How just one early retirement account withdrawal can hurt you

According to a study from Charles Schwab, in order to retire comfortably, the average person is going to need access to almost $2 million during their post-work lives. That means every little detail of your retirement strategy matters.

Knowing how much you might need in retirement places even more emphasis on avoiding early withdrawals. The reality is that early withdrawals from a retirement account like a 401(k) hurt you in a variety of ways. Typically, if you take money from your 401(k) before age 59 1/2, you’ll be hit with income taxes and a 10 percent penalty fee on the withdrawal’s total.

While the taxes and penalty fee should worry you — the real pain comes from hurting your long term earning power. USA Today notes that when the pandemic first hit, the average early withdrawal from 401(k)s was $5,500 and the average 401(k) balance was $104,400. If you make one, $5,500 withdrawal (assuming a 7 percent return), in 25 years that will amount to about $29,851 lost in possible gains. And obviously, if you are saving even longer than 25 years, the amount of lost gains keeps increasing.

Keep in mind that the example mentioned above is accounting for just one early withdrawal — if you make more than one, you will lose out on even more. Bottom line: Your retirement accounts are best left untouched. It’s better in the short term and the long term as well.

Chris O'Shea