I make an effort to check my retirement accounts quarterly. I find it to be a strangely enjoyable experience because it’s nice seeing cash add up from monthly contributions, employer matches, and more. It makes me forget that I’m dealing with a massive amount of student debt for a second!
And then, a voice whispers in the back of my head: “What if you took some of this money out early and used it to pay off some student loans? Imagine how much easier life would be.”
I admit it’s a tempting offer. But thankfully, I always manage to log out before I can start acting on it.
It can be really tempting to liquidate a long-term investment or savings account for something you want in the short term. Here’s why that may not be such a good idea, and how you can resist the urge to act on it.
With Money, You Have To Think In Terms Of Decades
This isn’t an easy thing to do. It’s arguably an impossible thing to do. How could you know what your financial needs will be 10, 20, 30 years from now, when you have no idea what your life will even look like then?
My thought is, you really can’t. But what you can know is that your financial needs will likely only increase as you get older. It makes sense, right? You might be renting an apartment in a major city now, but you may own a house one day. You might be feeding just yourself for now, but what if you have a few kids down the road? And, the sad reality is that as we get older, our bodies probably need a lot more health care than when we’re young and spry.
Step 1 to not touching those investments is the realization that future you, whoever that is, will likely need the money you’re building up a lot more than you need it now.
Also, keep in mind that if you’re thinking of pulling money out of a retirement account, what you see there won’t be what actually ends up in your bank account. If you’re younger than 59-and-a-half, the IRS automatically smacks your wrist with a 10% penalty on early withdrawals. Plus, you’ll obviously have to pay the taxes on any pre-tax contributions you put in!
Consider The Impact Of Your Choice
The thing that makes me click away from the withdrawal button every time is pretty sobering. I go to a retirement calculator, and project what my account balance would be if I kept contributing what I contribute and kept my current balance. Then, I calculate the same thing, but with no balance (as if I took out everything I’ve saved.)
The difference is usually hundreds of thousands of dollars! The power of compound interest is no joke.
Student debt sucks, but is taking out a huge chunk of it now worth not having hundreds of thousands of dollars more when I’m older? I don’t think so.
Should Everyone Leave Their Savings Alone?
As I’ve said before, everyone’s situation is different. While in my case, I think not withdrawing from my retirement savings makes sense, that might not be true for everyone.
For example, there might be some folks out there who have really toxic debt: the kind with double-digit interest rates that just seems to grow, and never shrink.
Now, I am not a financial adviser, and you should probably speak to one before considering anything like the following. However, if you find that you have debt with an interest rate that’s outpacing the rate of return of your investments (usually estimated to be around 7%), then it may make sense to throw everything you have at that debt to get rid of it—even if it means paying the IRS’s early withdrawal penalty.
As long as you know the facts about your money and debt, you can begin making a plan that makes sense for you to maximize your financial happiness.
Have you ever withdrawn from a long-term investment before? Was it the right move for you, or do you regret having done so now? Sign up or log in with your Salt account to let me know in the comments!