My last post addressed the dangers of pulling from your retirement fund before reaching the prescribed retirement age (typically 59 ½). In short, withdrawing from a 401(k) can be a costly decision that can potentially derail your retirement planning.
But what if something unexpected comes up and your emergency fund simply won’t cut it? What are the alternatives?
Here are 6 alternatives to pulling against your retirement fund:
1. Rethink your purchase
If you’re thinking about dipping into your retirement fund in order to pay for a new car, a vacation home, or some other large purchase, you may want to take a step back and reconsider. How much does this purchase really mean to you? Is it worth putting your retirement on the line?
If you’re determined to follow through with the purchase, ask yourself: “Can it wait?”
Even if you’re dying for a lakeside cabin of your very own, try waiting a couple years and work on building your savings. You’ll thank yourself later when you’re retired and have enough money to keep up cabin repairs in addition to day-to-day expenses and little luxuries!
2. Tap into a savings account
Hopefully, you’ve been keeping up with regular deposits to a savings/emergency fund. This is what it’s there for! If you have an immediate need for cash, turn to your savings account, rather than your retirement fund. But, be mindful. Try not to withdraw from this fund unless it’s a true emergency.
3. Take out a loan
Banks offer a wide range of loans, including home-equity loans. Due to the compound interest you lose by pulling against your retirement fund (and all the penalties you incur), it’s often a better idea to apply for a loan than to tap into your retirement money.
Aside from normal bank loans, another type of loan to consider is a cash advance from your employer. Depending on the rate and the payback period, this type of loan may be a good option. It’s tricky ground to navigate, but if you’re in dire straits, it could be a good option.
Loans can be complicated and interest rates and terms vary wildly. It’s always a good idea to talk to a financial advisor before making a move.
4. Sell off an asset
Before diving into your retirement, think about the assets you may already have lying around. An unused sailboat, seldom-worn jewelry, your old motorcycle—the things sitting around collecting dust may actually be valuable enough to help your financial situation. BONUS: Getting rid of your seldom-used things can help de-clutter your space and give that object a “second life.”
5. Ask for help
Depending on your situation, it’s okay to ask for help. Granted, you wouldn’t start a “Go Fund Me” page just to buy a new jet ski or sports car, but if you (or someone in your family) has suddenly fallen ill or if you’re trying to raise money to go back to school or if your house was robbed, then ask away! Oftentimes, church groups or other volunteer organizations can help you out if you’ve been struck by a tragedy. All you have to do is swallow a bit of pride and start asking.
6. Change your thinking
If you begin thinking of your retirement fund as an off-limits (or even non-existent) entity, you won’t be tempted to tap into it. Just pretend that money doesn’t exist. This kind of thinking will force you to be more innovative and prudent with your money. And that can never hurt!
With a little discipline and some creative thinking, there are plenty of ways to resist pulling from your retirement fund. Find the alternative that works for YOU.
If you'd like more information on alternatives to withdrawing from your retirement fund, please send me a note.