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