When unexpected financial setbacks arise, many working Americans are turning to withdrawals from their retirement savings as a way to recover. This short-term misuse of long-term money can have a crippling effect on their retirement income later in life.
While an unplanned, short-term expense can seem dire in the moment, and often is, a permanent shortfall in retirement funds can be a truly life-changing situation. In most cases, when a person takes a withdrawal from a retirement account, they are typically required to pay income taxes on the money in addition to a 10% early-withdrawal penalty. Once that money is out of the account, it can be difficult to catch back up.
This illustrates the importance of having money set aside in emergency savings for these short-term needs. Often referred to as an “emergency fund”, this cash reserve is designed to be there when unexpected financial jolts are encountered. This approach allows a person’s retirement savings to continue to grow and compound while allowing the short-term, liquid savings to be used when life gets rocky.
Make this the year to create or update your financial plan with your trusted advisor.