By Craig Erwin, Ph.D.
What’s the difference between working and not working? More than you think. When you are working, you are infinitely more able to prepare for retirement. When you are unemployed, dreams of retirement can start slipping away as you become less and less able to save for it. Instead of earning and saving money, you may be forced to stop saving or even to start spending your retirement savings.
When I was young and foolish, I dipped into my retirement savings during a 6 ½ month trip to Europe. I haven’t made that mistake again.
According to US News & World Report, the painful consequences of withdrawing money from a 401(k) prematurely include taxes and penalties. In addition, the withdrawal won’t earn interest and it may not even be protected from creditors.
When you’re working, you can save for retirement, but when you’re not working you can’t. It gets worse though. If you’re not working, not only are you unable to save, you might have to pull money out of retirement savings to pay everyday living expenses. And that would drain your retirement savings.
The 22nd Annual Transamerica Retirement Survey found that, during the pandemic 21% of unemployed individuals dipped into retirement savings. Even more alarming is that far more employed workers dipped into retirement savings – 61%. So just about everyone dipped into retirement savings. That’s very risky because there is a high risk that, if you take money out of retirement savings you won’t replace it. When it comes time to retire, you’ll have less money to retire on.
Whether you are working or not, if you dip into retirement savings, it will almost certainly affect whether and when you can retire. Let’s say you are out of work for two years. If, instead of saving for retirement for those two years, you drain your retirement account. That could push your retirement age out several years and it might mean retiring to a significantly lower standard of living.
Whether you are working or not, pulling money out of a retirement account before you retire may adversely affect your ability to retire when you want and how you want. Unless it’s an emergency, don’t dip into retirement savings. It could make your golden years far less golden.
Have you had stretches of unemployment? If so, how did it affect you and your efforts to prepare for retirement?
For more information on unemployment, retirement, and preparing for retirement, click on the following links:
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