海角大神

What mistake? According to the Arizona Star,聽.

The only way this even looks like a good idea at all is if聽you鈥檙e looking聽only聽at the very,聽very聽short term.聽If you look beyond that, making this move is pretty clearly worse than using a high-interest credit card to pay your bills. In fact, if we鈥檙e comparing disastrously bad financial moves, I鈥檇 actually prefer to use a credit card cash advance to pay a bill than pull money out of my 401(k) early.

Why is it so bad to tap into your 401(k) early? Let鈥檚 use this聽聽to see how big the disaster is.

Let鈥檚 make a few reasonable assumptions first.聽

First of all, let鈥檚 say we want to take聽$20,000聽out of our 401(k). We鈥檙e in the聽33%聽federal income tax bracket, and we pay聽5%聽in state income taxes. We鈥檙e 45 years old and don鈥檛 plan on retiring for聽20聽years at least. If we left our money in there, we鈥檇 get an average of a聽7%聽return each year until retirement 鈥� the long term return that Warren Buffett suggests people will get from the broad stock market.

On that $20,000, you鈥檒l have to pay a $2,000 early withdrawal penalty, $6,600 in federal taxes, and an additional $1,000 in state taxes. Thus, out of the $20,000,聽you鈥檒l only keep $10,400 of it. Between federal and state taxes, you鈥檙e going to lose just about half of your money instantly. Poof.

Let鈥檚 say that instead you left it there where it earns a 7% annual return. In twenty years, your investment will be worth $77,394. That鈥檚 the start of a pretty nice nest egg, one that will probably give you聽$3,000 or so a year take-home all throughout retirement.

厂辞,听just to get $10,400 now, you鈥檙e sacrificing $3,000 a year for years and years and years when you retire.聽That is an聽incredibly聽bad trade.

Then there鈥檚 the flip side of that coin.

Let鈥檚 assume the average person pulling money out of their 401(k) is making $50,000 a year. That鈥檚 a little higher than the average American salary, but many of the low-end salaries don鈥檛 have a 401(k) involved, so we鈥檒l assume a bit higher average income.

If that person can find a way to come up with just聽20%聽of their annual income to fix their financial situation, they don鈥檛聽have聽to pillage their retirement.

Clean out your closet and sell the junk you don鈥檛 use. Write a grocery list when you go to the grocery store and stick to it. Even better, don鈥檛 go to the grocery store on an empty stomach. Have some friends over to your house instead of going out. Stop using your credit card for purchases and live off of cash so that you鈥檙e paying less credit card interest every month. Call up your creditors and negotiate a lower interest rate or a payment plan.

If you鈥檝e been reading The Simple Dollar for long at all, you get the idea.聽

Fixing a short term problem by pillaging your long term savings is聽never聽a good idea.聽If you鈥檙e eyeing your retirement savings in order to keep your head above water or to enjoy some life 鈥渢reat,鈥� turn your eyes instead to the multitude of tools you already have in your life for coming up with some quick cash or trimming back your spending for a while.

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