Not much causes my heart to race like when one of my clients asks me about pulling money from their retirement fund. Even though it seems like a simple endeavor with immediate rewards, it is actually a dangerous practice that can set you completely off track for retirement and cost you much more money in the long run than you might think.

Why is pulling from your retirement account such a bad idea?

pull money from retirement

For one, most people under the age of 59 ½ will immediately incur a 10% penalty. After that, you’ll have to pay interest on the money you pull out (usually around 20%, depending on your circumstances). That means the money you’re taking from your account is already whittling away.

As David Weliver of “Money Under 30” puts it, “Paying the 10 percent early withdrawal penalty is just dumb money—it’s equivalent to taking money you’ve earned and tossing it out the window.”

On top of that, there’s an even larger factor to consider: Compound interest.

Compound interest is interest added to the principal of a deposit or loan so that the added interest also earns interest from then on (find a discussion on compound interest on page 35 of my book, Self-Wealth). To put it another way, your retirement fund will earn interest…and then that new, larger sum will earn interest…and so on. So when you remove money from your retirement account—even for just a little while—you endanger the growth of the account.

Not to mention you’ll essentially be paying taxes on the money twice. When you repay a 401(k) loan, you do so with post-tax money. THEN, when you later withdraw those funds in retirement, you’ll pay taxes on the same money again.

Pulling against your retirement fund can also lead to high-risk spending behavior. A large portion of people who withdraw from their retirement fund do it multiple times. Also, many people see the extra money as false security and begin to focus less on their savings. As Doug Fisher, a Fidelity senior V.P. said in a statement, “Within five years of taking a loan, 40 percent of borrowers decrease their savings rate, and more than a third of those stop saving altogether.” Now that’s troubling!

There are many more reasons why pulling from a retirement fund can be disastrous. If you’re not convinced, ask a financial planner!

What can you do instead of drawing on your retirement fund? In my next blog post, I’ll go over some alternatives. Stay tuned!

(If you’d like an immediate notification when the next blog post is published, please click on Subscribe to Blog via Email in the side bar and enter your email address. Thanks!)

26 thoughts on “The dangers of pulling from your retirement fund

  1. I know this if off topic but I’m looking into starting my own blog and was wondering what all is needed to get set up? I’m assuming having a blog like yours would cost a pretty penny? I’m not very web savvy so I’m not 100 certain. Any tips or advice would be greatly appreciated. Kudos

  2. I just like the helpful information you provide on your articles. I will bookmark your blog and test again here regularly. I am fairly certain I will be told plenty of new stuff right here! Good luck for the next!

  3. After study a couple of of the weblog posts in your website now, and I truly like your method of blogging. I bookmarked it to my bookmark web site checklist and will be checking back soon. Pls try my website online as properly and let me know what you think.

  4. Faytech North America is a touch screen Manufacturer of both monitors and pcs. They specialize in the design, development, manufacturing and marketing of Capacitive touch screen, Resistive touch screen, Industrial touch screen, IP65 touch screen, touchscreen monitors and integrated touchscreen PCs. Contact them at, 121 Varick Street,3rd Floor,New York, NY 10013,+1 646 205 3214

  5. Great items from most people, man. I have be aware your stuff before and you’re simply exceptionally great. I actually like whatever you have acquired here, really like what you’re stating and the best way wherein you are declaring it. You are making it entertaining and you continue to care for to maintain it smart. I can not wait to learn to read far more from people. BLOGURL is really an excellent site. NAME

  6. It is the right day to put together some schedules for the upcoming. I’ve read this document and if I may, I wish to recommend you couple worthwhile instruction.

  7. I just need to show you that I am new to writing and completely enjoyed your report. Very possible I am going to store your blog post . You truly have amazing article materials. Get Pleasure From it for telling with us your domain document

  8. You actually make it seem so easy together with your presentation but I find this topic to be really one thing which I feel I might by no means understand. It seems too complicated and very broad for me. I’m taking a look ahead on your next put up, I¡¦ll attempt to get the dangle of it!

  9. Pingback: Google

Leave a Reply