What's one of the worst things you can do to foil your retirement plans? Answer: Take an early withdrawal from your retirement account.
Despite the supposed fact that we're in an economic recovery, a surprising number of people did just that, according to Bankrate's Financial Security Index, released on Monday. In fact, 19 percent, or nearly one out of five, felt compelled to raid their retirement account over the last 12 months to cover emergencies. And they weren't all out of work. The vast majority -- 17 percent -- were employed full time.
As Sheyna Steiner's story points out, an early withdrawal of $10,000 isn't just $10,000. It's a loss of future earnings. On top of that, if you withdraw $10,000, you don't end up with $10,000 because you have to pay taxes and in most cases, penalties if you're younger than age 59½. Depending on your tax bracket, you end up with substantially less -- $6,500 after paying taxes and penalties if you're in the 25 percent tax bracket, or $7,500 if you're in the 15 percent bracket.
Future earnings quantified
Just what does it mean to lose future earnings? Let's assume you have a moderate risk level and your portfolio earns 7 percent on average over the next 10, 20 or 30 years. In 10 years, that $10,000 would have nearly doubled, to $19,672. In 20 years, it would have nearly quadrupled, to $38,697. Over 30 years, a $10,000 withdrawal would cost you $76,123. That's a lot of money that could have been used toward paying electric bills or dining out.
That's assuming a relatively conservative return. If you earn 8 percent, the loss is $21,589 over 10 years; $46,610 over 20 years; and $100,627 over 30 years. This is what is meant by the "magic of compounding." Most of this snowball-effect occurs between years 20 and 30.
You have to agree, this is not chump change.
What's the worst way to damage your retirement? Not saving anything at all. According to the 2011 Retirement Confidence Survey released in March by the Employee Benefit Research Institute, 35 percent of workers who are 45 years of age or older are not currently saving. Nearly one in four (24 percent) of those age 55 and up have not saved for retirement. Among those in that age group who have saved, 29 percent have accumulated less than $10,000.
Now that is retirement planning gone amuck.
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