The average American retires at 62 years old. That leaves the typical retiree with a good 20 years of living to do once work is over and done. How are you going to pay the bills once you’ve hung your hat? Enter: the 401(k). Invest 15% of your income and let that puppy grow.
But here’s a question: Is it ever okay to pull money out of your 401(k) early?
We’re frequently asked this question on Chris Brown’s True Stewardship. People want to know if they should pull from their 401(k) to pay off consumer debt, send their children to college, or pay off the mortgage. The short answer to all those questions is, “No way, Jose!” There are a few big reasons why.
1. You’re stealing from yourself.
You don’t want to rob Peter to pay Paul—especially when you’re Peter!
It might not seem like a big deal to just take out a few thousand dollars to pay off your car note. After all, it’s only $5,000. But did you know if left alone for the next 20 years, that money can turn into more than $33,000? Give it 35 years and you’re looking at more than $140,000. Are you willing to pay $140,000 to get rid of a $5,000 car note?
2. The penalties are huge.
Withdrawing money from your 401(k) early is going to leave a mark—a pretty ugly one. Depending on your tax bracket, you could pay 30–40% in penalties and taxes. Ouch.
You don't want to hand over more of your retirement savings to the government than necessary, especially if it's just because you wanted to cash it out early. There are almost always other options than dipping into your 401(k).
3. You’re losing compound interest.
Albert Einstein called compound interest the eighth wonder of the world—and he was right! The actual math behind saving for retirement is easy. It’s the waiting game that trips people up. You don’t want to be the guy paying interest, right? You want the interest working for you.
The average car payment in America is almost $500 a month. If you were to invest that for 30 years, you’d contribute $180,000 out-of-pocket but end up with over a million dollars. Yes, you read that correctly. You could be a millionaire by letting compound interest work its magic.
4. You’re going to retire.
Assuming the sky doesn’t fall on your head, there’s a pretty good chance you’re going to retire. Meanwhile, research shows that only about half of students graduate college with a degree or certificate. Yikes. Your kid’s diploma might look good on the wall, but are you counting on it to feed you in your golden years?
We all want the best for our kids, but withdrawing money from your retirement to send little Johnny to college isn’t a good plan. Trust us. When you show up on his doorstep with all of your belongings and no savings, you’ll both regret the day you took money out of your 401(k) to pay for his school.
Don’t get the wrong idea here. We want you to pay off your consumer debt, help the kids go to school, and get rid of that mortgage payment. But pulling a chunk of change out of your 401(k) to do it isn’t in your best interest. There are other ways to hit those goals without stealing from your retirement. Explore those other options, but leave your 401(k) alone and let it grow—then live out those golden years in style.