Should I Take Money Out of a Retirement Account Early?

Earlier this week, on the Facebook page, I posted that I heard a financial adviser coach someone to withdraw $110,000 from their retirement account to pay off their mortgage. The caller’s situation was clear. He had about $300,000 in retirement accounts and about $110,000 left on the mortgage.

Friends, this is some of the WORST advice I have ever heard.

I am going to walk you through why this is poor advice, but first let me give you two examples as to when it is acceptable to withdraw from your 401(k):

1.     To avoid bankruptcy

2.     To avoid federal or state legal issues from taxes

That’s really it. I am sure there are nuanced situations that do not fall into one of those two categories. Regardless, those are the two most common.

Is it that big of a deal?

Rather than lecture about the disastrous nature of this, I’ll give you the numbers. We know a few things and we are going to assume a few things:

1.     The caller was 40

2.     He was putting 15% of his $75,000 (6% match)

3.     He is going to retire at age 62 (assumption)

4.     His average market rate was 9% (assumption, fair)

So here is how much he retires with NOT taking out the $110,000:

-        $3,076,958.16

And here is how my man fairs if he PAYS OFF his mortgage out of his retirement:

-        $2,344,512.11

That is nearly a $700,000 difference, all for a paid mortgage…keep in mind, this does not take into account the early withdrawal fee of 10% + your tax bracket from any money you pull out before age 59 1/2. 

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I get the allure of having a paid off mortgage, but that is a $700,000 mistake. If he didn’t retire until 66, it is a $1.1 million-dollar mistake.

Retirement is for the Young

$200 per month from 18 to 62 at 9% interest (average) is $1,268,528.35

That isn’t going to happen for most 18 year-olds, but this is a good illustration as to why it pays to start early with retirement.