It can be difficult to resist the urge of cashing into a retirement plan. You put a portion of your paycheck into it for years, and have watched the fund grow from nothing to several hundreds of thousands of dollars. You dream about taking a big vacation, remodeling your basement, or purchasing a new vehicle. However tempting these new purchases may seem, it is important that you leave your retirement fund untouched, until time of retirement. Prematurely cashing into your retirement fund can cause many negative consequences.
Less money to retire on
Many seniors underestimate their financial need for retirement. They wrongly assume that because their house and cars are paid off, that they do not need much to live on. However, you will still require a substantial amount of money to continue with your current quality of living. You will no longer have income from a job, and will still be required to make utility and tax payments. You will also still have a need for things like groceries, gas, and travel expenses. If you plan to travel during your retirement, you will require even more money. It can also be difficult to accurately estimate how many years you will have in retirement, making it harder to budget appropriately.
Less medical care
Another common mistake when financial planning for retirement is accounting for medical needs. For one, you cannot predict the types of medical problems you will encounter, making it difficult to know what types of assistance and medications you will need. You are also likely to lose your medical care at your place of employment once you retire. You may qualify for a Medicare supplement or another type of social security health insurance, but it is unlikely to be similar to your work related health insurance plan.
Approximately 90% of Medicare participants have some form of supplemental health insurance. These include private employer sponsored plans, Medicare Advantage Plans, Medigap or Medicare Supplement insurance plans, and Medicaid for low income citizens. Most people in retirement find that they require some type of supplemental health insurance, and many do not properly account for this during financial planning.
Most financial planners recommend that you put a portion of your paycheck away for unexpected expenses, or emergencies. When you no longer receive a paycheck, you will find that this fund quickly decreases. If you are met with an unexpected expense, such as high medical bills or loss of residence, you may not have enough money to cover the expenses.
One of the most common types of unexpected expenses is being forced to leave work before originally planned for retirement. About 50% of 2015 retirees say they left the workforce earlier than they planned, for reasons such as health problems (60%), downsizing or closure of company (27%), or caring for a spouse or family member (22%). Only 31% of early retirees said they retired early because they could afford it. Cutting into a retirement fund prematurely can make you less prepared for unexpected expenses.
You lose compound interest possibilities
The reason that so many financial planning companies recommend investing in retirement as early as possible is because of the possibilities of compounding interest. Compounding interest reinvests your money earned into your retirement account and over time, you see much higher results than in any other type of investment. Over long periods of time, stocks have averaged returns of about 9.5% per year. This means that if you invest $5,000 per year for 30 years ($150,000) total, it could grow into a nest egg of nearly $750,000. Cashing in your retirement fund early could severely decrease this amount.
Most types of financial services and financial planning companies adamantly advise against cashing into a retirement account for any expenses before retirement. This is with good reason, as premature cashing is can cause you to not have enough to live on during retirement, to lose high gains over many years, and to be unprepared for unexpected expenses, such as being forced to retire earlier than expected. Cashing into a retirement account before actual retirement can be disastrous to your financial situation.