The Top 5 Reasons People Tap Retirement Funds Early

broken nest egg
Photo by Todd Taulman Photography / Shutterstock.com

Withdrawing money from a retirement account early should be a last resort — basically, only in the case of a financial emergency in which you have no other option. But financial emergencies are not the main reason why folks dip into their retirement savings early.

Folks are much more likely to crack their nest eggs before retirement for a much more mundane reason, according to a recent GOBankingRates survey: to pay off debt or bills.

Close to 2,000 people were polled for the survey. Those who said they had withdrawn money from their retirement savings early were then asked the main reason for which they did so. Respondents could choose from five options:

  1. Pay off debt or bills: cited by 43.99 percent of survey respondents
  2. Pay for a financial emergency: 21.72 percent
  3. Pay for medical expenses or health care: 21.66 percent
  4. Purchase a home: 9.36 percent
  5. Pay for higher education: 3.27 percent

The survey basically posed this as a multiple-choice question, so it’s possible there are other reasons for which respondents tapped retirement funds early.

Still, these findings make it clear that folks are twice as likely to prematurely tap retirement funds to pay off debt or bills as they are to use the money to survive a financial emergency such as a job loss.

The high cost of early retirement withdrawals

When you withdraw retirement funds early, it costs you more than the amount of money you withdraw. You also lose out on the earnings that money would have generated if it had remained in your account.

Further, if take an early withdrawal from a taxable account — such as a traditional 401(k) or traditional individual retirement account (IRA) — before the age of 59 1/2, you will generally incur a 10 percent penalty from the Internal Revenue Service.

There are exceptions to the penalty, but many types of debt and bills are not among them.

Let’s say you take $10,000 from your traditional IRA at age 45 to pay off debt or bills. Unless you qualify for an exception, it will cost you:

  • The $10,000 by which you depleted your nest egg.
  • The earnings that $10,000 would have generated by the time you would have withdrawn it in retirement. If the money otherwise would have sat in your account for another 20 years and earned a 7 percent rate of return during that time, it could have generated an extra $29,600 for you.
  • The 10 percent IRS penalty — $1,000 in this case.

That amounts to a whopping $40,600 — not counting any earnings you could have generated by investing that $1,000 you used to pay the penalty. (For simplicity, we also did not include the taxes you would owe upon early withdrawal.)

So, if you are considering tapping retirement savings to pay off debt or bills, reconsider all your options — including the following — before proceeding:

How do you feel about early retirement withdrawals? Share your thoughts below or over on our Facebook page.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Read Next
7 Ways to Save Even More at Dollar Stores
7 Ways to Save Even More at Dollar Stores

Yes, it’s possible to pay less than a buck for items from a dollar store. Here’s how.

8 Ways to Snag Extra Savings at Walmart
8 Ways to Snag Extra Savings at Walmart

Are you aware of all these ways to boost your savings in Walmart stores and at Walmart.com?

11 Small Money Moves That Will Make a Big Difference
11 Small Money Moves That Will Make a Big Difference

These small money moves will pay off big in the long run.

15 Products You Need — Even If You Didn’t Know It
15 Products You Need — Even If You Didn’t Know It

Discover some must-have products on Amazon that you didn’t even know you were missing.

12 Easy Ways To Make Make Money Online Without Leaving Home
12 Easy Ways To Make Make Money Online Without Leaving Home

If you’re hanging around the house a lot these days — and who isn’t? — use your time to make some extra cash.

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Most Popular
9 Things You’ll Never See at Costco Again
9 Things You’ll Never See at Costco Again

The warehouse store offers an enormous selection, but these products aren’t coming back.

11 Things Retirees Should Always Buy at Costco
11 Things Retirees Should Always Buy at Costco

This leader in bulk shopping is a great place to find discounts in the fixed-income years.

Over 50? The CDC Says You Need These 4 Vaccines
Over 50? The CDC Says You Need These 4 Vaccines

Fall is the time to schedule vaccines that can keep you healthy — and even save your life.

11 Household Items That Go Bad — or Become Dangerous
11 Household Items That Go Bad — or Become Dangerous

When you get the impulse to stockpile these everyday items, pay close attention to their expiration dates.

Why Cloth Masks May Increase Your Coronavirus Risk
Why Cloth Masks May Increase Your Coronavirus Risk

A new study finds that wearing a cloth mask can backfire if you don’t clean it properly.

8 Things You Can Get for Free at Pharmacies
8 Things You Can Get for Free at Pharmacies

In this age of higher-priced drugs and complex health care systems, a trip to the pharmacy can spark worry. Freebies sure do help.

The 15 Worst States for Retirees in 2020
The 15 Worst States for Retirees in 2020

Based on dozens of metrics tied to affordability, quality of life and health care, these are not ideal places to spend retirement.

7 Ways to Boost Your Credit Score Fast
7 Ways to Boost Your Credit Score Fast

Your financial security might soon depend upon the strength of your credit score.

These Are the 4 Best Medicare Advantage Plans for 2020
These Are the 4 Best Medicare Advantage Plans for 2020

Medicare Advantage customers themselves rate these plans highest.

This Is the Cheapest Place to Buy a Used Car
This Is the Cheapest Place to Buy a Used Car

Looking for a good deal on a set of wheels? This should be your first stop.

The 10 Most Commonly Stolen Vehicles in America
The 10 Most Commonly Stolen Vehicles in America

A new model parks atop the list of vehicles that thieves love to pilfer.

19 High-Paying Jobs You Can Get With a 2-Year Degree
19 High-Paying Jobs You Can Get With a 2-Year Degree

These jobs pay more than the typical job in the U.S. — and no bachelor’s degree is required.

5 Ways to Get Amazon Prime for Free
5 Ways to Get Amazon Prime for Free

Hesitant to drop $119 a year on an Amazon Prime membership? Here’s how to get it for free.

5 Keys to Making Your Car Last for 200,000 Miles
5 Keys to Making Your Car Last for 200,000 Miles

Pushing your car to 200,000 miles — and beyond — can save you piles of cash. Here’s how to get there.

26 States That Do Not Tax Social Security Income
26 States That Do Not Tax Social Security Income

These states won’t tax any of your Social Security income — and in some cases, other types of retirement income.

3 Ways to Get Microsoft Office for Free
3 Ways to Get Microsoft Office for Free

With a little ingenuity, you can cut Office costs to zero.

10 Reasons Why You Should Actually Retire at 62
10 Reasons Why You Should Actually Retire at 62

If you can, here are several good reasons to retire earlier than we’re told to.

7 Surprising Features That Boost Your Home Value
7 Surprising Features That Boost Your Home Value

You can add value to your home without hiring a contractor to do expensive renovations.

5 Things That Make Life More Meaningful for Retirees
5 Things That Make Life More Meaningful for Retirees

Retirees agree: These are the things that give them purpose and fulfillment in their golden years.

View More Articles

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Add a Comment

Our Policy: We welcome relevant and respectful comments in order to foster healthy and informative discussions. All other comments may be removed. Comments with links are automatically held for moderation.