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How to sabotage your retirement

By Barbara Whelehan ·
Friday, April 29, 2011
Posted: 2 pm ET

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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May 19, 2011 at 6:08 pm

So 53% of people 55 and up have less than 10 grand? That's the problem, I think, not the rest of your chiding figures. Must be nice to smell so good, dear.

Cash King
May 15, 2011 at 2:37 pm

If Barbara Whelehan were managing 100% of the nation’s 401k getting returns of 7% instead of the crooks that robbed Americans blind then all 19% of them would have kept their money invested rather than cashing in and running for the hills.

How to sabotage your retirement? Keep believing your fund manager is working for you and not for his/her best interests.

Firms shorted while America’s retirement funds plummeted and made a fortune. Barbara’s hypothetical 7% returns are just what it is.

I am not a tin foil hatter saving my money in a mattress. I am exploring my entrepreneurial goals planting seeds that may or may not grow and provide income if/when I retire. Sure there is uncertainty but at least some Wall Street crook isn’t going to hoard my hard earned money. I will take my chances elsewhere. Thanks.

Coyote Sneaker
May 12, 2011 at 8:45 pm the $10,000 withdrawal doesn't adjust for inflation? The argument is still quite valid, but compare apples-to-oranges. It's highly unlikely given historic inflation and rate of return statistics that you can conservatively state that you can earn 8% over baseline inflation over a 30-year time period.

May 12, 2011 at 12:02 pm

I say it depends on what you do with the withdrawal that matters most. When i realized that we had elected a Marxist in to the White House I took early withdrawal and was able to set up my own portfolio that's averaging 20% (that's correct) ROI and purchase precious metals. I also bought real estate below market AND eliminated all my credit card debt. I am so much better off getting my house in order now using MY money in the present to help make things better for the future that is uncertain because of the current anti-business environment.

Amos N Andy
May 05, 2011 at 9:36 pm

I am pretty sure that 17% is the same percentage as the 19%, not 17% OF the 19%.

My wife and I have been able to save between 45%-50% of our net pay every month in our 12 years of marriage. It has been quite easy to live on the other 55% given that we buy used cars, and live in a place that is less than 25% of our net pay every month. We have broadband internet, satellite TV, and two cell phones. We aren't living like monks, always pay off our credit bills, and have almost 400k in our savings so far. Just took some discipline and the tiniest brain power to stick with it. We've had medical catastrophes and huge car repairs, but we've always managed to keep the lights on and then some.

Barbara Whelehan
May 01, 2011 at 10:36 am

I was referring to 7 percent as being relatively conservative, and then moved on to what the loss could be if you earned 8 percent. However, it can be argued that 8 percent is conservative from a historic standpoint, since over several decades the stock market has returned in the neighborhood of 10 percent on average.

d Hamilton
May 01, 2011 at 9:27 am

Where do you get a relatively conservative 8 percent?

Barbara Whelehan
April 30, 2011 at 11:35 am

If 19 percent withdrew money from their accounts, and 17 percent were employed, then roughly 89 percent of those who withdrew money were gainfully employed. That would be the vast majority.

Anony Mous
April 30, 2011 at 10:19 am

Since when is 17 percent "the vast majority"?