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The Dangers of Early Retirement Saving Withdrawals

Every person wishes for a luxurious lifestyle after retirement. These hopes and dreams are shared by nearly everyone. People don’t always realize, though, that these dreams can slip away if they pull too much money from their 401(k) or similar retirement plan. Unfortunately, people have gotten into the habit of raiding their retirement plan for current expenses.

The primary withdrawals that folks make are loans that don’t get repaid and cash outs if they switch jobs or in find themselves in financial hardships.

Early Retirement WithdrawalsPulling funds from a retirement plan may seem like a quick way to solve your cash-flow problems if you lose your job or need to pay a huge credit card bill. Liquidating your 401(k) may not seem like a big deal, but the consequences can outweigh the benefits. Once you withdraw your savings, they can be difficult to replace. The power of tax advantaged accounts is that they allow for pre-tax contributions. This opportunity is often missed by younger investors who cash out early, setting their retirement savings back.

Taking out a 401(k) loan avoids taxes and penalties but you have to pay yourself back with interest. Also, if the market shoots up you’ll miss out on potential gains. An important disadvantage to pulling money out is that it generates a huge tax bill. If, for example, you cash out $100,000 from a 401(k), you would likely be left with $70,000 in cash after 20% withholding and a 10% early withdrawal penalty.

In order to retire with a sufficient amount of money, you have to be disciplined enough not to withdraw cash from your retirement. A little self-control can go a long way when it comes to planning your future.