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- The CEO and founder of a retirement-planning app says two things could jeopardize your retirement: withdrawing from your 401(k) and spending too much.
- Avoid spending on things that aren’t necessary, as those purchases could hinder your ability to stay invested right now, or require you to take on debt.
- If possible, avoid borrowing or withdrawing from your 401(k) — doing so could mean lower balances in the future and less growth.
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Retirement savings grow over time, so balancing your immediate needs with your long-term goals is a must, especially when you’re years away from retiring. Interrupting the amount you’re adding to your savings, even years before you need it, could be detrimental to the amount you’ll have when it’s time to retire.
Rhian Horgan, CEO of financial technology company Kindur and founder of retirement planning app Silvur, says no matter how tempting it is to borrow from your 401(k), or how easy it is to overspend during your working years, avoiding these traps is a must.
Getting into the habit of overspending makes it harder to afford retirement
As today’s economy struggles with rising unemployment rates and volatile stock markets, now is not the time to take on new debt, buy items you wouldn’t usually, or splurge. “Dial down your spending to give yourself the ability to stay invested and ride out this market that we’re in,” Horgan tells Business Insider.
“Now is probably not the time to be thinking about buying a new car or a new boat,” Horgan says. It’s the time to focus on saving, and working toward your long-term goals. “What are the ways that you can pull back on the discretionary spending, but also still have some quality of life?” she asks.
Not only does spending more than you should make it hard to continue investing for the future, but potentially taking on debt also makes it more difficult to transition into retirement on a limited income. By keeping your costs down and your lifestyle on-budget, you can set yourself up for long-term financial success.
Withdrawing from your 401(k) should be a last resort
As Americans lose work and look for ways to make ends meet, taking money or borrowing from 401(k) accounts can sound tempting. The government has eased penalties on early withdrawals during the coronavirus pandemic, temporarily suspending the 10% penalty usually imposed on disbursements.
If you’re wondering if an early withdrawal is the right choice,”Generally, I don’t think that makes sense,” Horgan says.
Even with the relaxed restrictions, an early withdrawal or loan against your 401(k) could still do long-term damage. Retirement accounts depend on compound interest to grow, which means the longer you can leave your money alone, the better. Taking money out of your account could hurt the balance you’ll have saved when you retire, even if you replace it later.
Though it should be a last resort, sometimes it’s the only option. “From a cost of borrowing perspective, there are specific scenarios where it may be cheaper to borrow from your 401(k) then to take out a home equity loan or a credit card,” Horgan says.
If you’re considering borrowing from your 401(k), make sure to consider all of your other options first, like personal loans, credit cards, or home equity loans. Also, consider your ability to repay the loan quickly, and how possible it would be to add more to your retirement account to make up for losses.