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Investing Tip of the Day
* If you want to access retirement funds before age 59 1/2, look into several options such as first home & education rules, withdrawals of Roth contributions, and the 72(t) substantial equal payments method.
The best time to start saving & investing is when you’re young. If you started at age 25 saving $1000 per month in an 8 percent retirement fund, you’d have about $3.5 million when you hit 65. However, if you’d wait until age 45 to start, you’d only have $589,000. But it’s depressing to think that you can’t access your money until you’re in your 60s, so many young adults have the reaction common in the tweet above.
However, there are a ton of ways you can get at your money prior to age 65. Obviously, you can withdraw anytime and pay the taxes with 10 percent penalty, but there are many other options available where you do NOT have to pay the 10 percent penalty. Here are just some of the penalty-free options, depending on the type of plan you have:
- 72(t) Substantially Equal Payments are a way to withdraw a recurring calculated amount based on a formula, starting at any age.
- Roth contributions (but not earnings)
- 401(k) Loans, which are a method of essentially borrowing from yourself, and paying yourself back
- College tuition, first-time home purchase, health insurance, medical expenses, hardship withdrawals, and more
Here’s an Chap GPT summary: https://chatgpt.com/share/69ddb026-9394-832a-9178-7dc617a08f7c
Note that each of these options has pros and cons. They may not all be available on your specific plan, and you have to be careful in how you use them, so make sure you talk to a tax pro. The main point is that many of the things we need or want to save for (early retirement, buying a home, training for a 2nd career, handling emergencies, etc.) can be had with the help of your retirement accounts. Hopefully, you won’t need to dip into them until late in life, but it’s difficult to accumulate real wealth when the government is taking a piece of your earnings every step of the way. Take that example of the $3.5 million accumulated by the age 25 saver. If that saver had his/her money in a non-retirement account with 25 percent marginal tax, the age 65 balance would drop by $2 million! Conclusion: use your retirement accounts, and use them early!
When talking about the 401k, you’re absolutely right about investing early. I just recently retired and here’s some take-away thoughts. I didn’t start seriously contributing until my 30’s, so I lost a decade up front. Also, during one work related move, I got anally raped on the sale of my house and lost over $50k in equity due to the horrible market at the time. I had to pull a large amount out of the 401k (at a very punishing tax rate) in order to cover the down payment on my new house. So my 401k isn’t where it should have been, but it’s still doing fine.
But here’s the thing. I have three pensions (due to various job moves) and will eventually get SS once I turn 65 or 67 or whenever. All three pensions plus the eventual SS payments put together are still only a fraction of what my 401k contributes to my retirement. Without the 401k, I’d wouldn’t be able to retire for at least another decade, maybe longer. Well into my 70’s. So if you’re counting on SS or pensions or anything else for retirement, sorry, it ain’t gonna happen unless you plan to live like a pauper once retired.
If I had to do it over, I’d max out the 401k plus any other legal tax-free investments as early as possible. Do that and you’d be able to retire at 59 and a half and live like a king.
I am 76 years old been retired from work for 10 years. I grew up in a poor family. Dad lost a small 80 acre farm when I was 10, after 2 bad years in a row. We moved to the city lived in a crappy apartment. I decided two things when that happened. Not to be poor when I grew up and not to depend on the government for SS. I started savings a portion of my money on every bit I made as I had my first job after school and weekends when I was 15 years old. (1965) Some weeks it was only $0.50 and some weeks i was as high as $10.00. I opened a bank account and had $302. spent on my retirement when I graduated from high school. I didn’t think of that money as a savings account. I would tell myself that I was “Spending that money for my retirement.” That way I never touched it ever during my entire work career. After graduating from high school I enlisted in the Navy (1968-1972) and got paid twice a month. During those Navy years I spent hours in the library reading every book I could get my hands on that taught me how to invest, how not to get in debt, how to buy/sell stocks, futures and options buying/selling/trading while living within my means. I never spent more than I made. While I taught myself finance I still hadn’t moved my retirement money into the investing mode as I was waiting for the opportunity to develop. I worked in a scrap metal processing yard as a laborer for 3 years during the day, went to a junior college on the GI Bill during the evenings. In 1975 I decided to go back into the Navy for 2 years. Still “spending on my retirement.” Left the Navy a second time in 1977 and went back to my hometown. Worked at a trouble kids home as a medical technician and as a bartender 4 nights a week in a rugby bar. Met my wife to be and married in 1979. She had a four year degree and only would marry me if I went back into the Navy or finished getting my 4 degree. We married at a courthouse and I went back in the Navy a 3rd time. With my retirement money still untouched I saw my opportunity to get into the stock market in early 1980’s I had retirement money total of about 18K. I was watching several stocks that were tanking but none as bad as Chrysler. They’re stocks had plummeted from a high of about $70.00 to a low of just over a dollar a share. My wife added 10K and I put every penny that I had saved. The government bailed out Chrysler a month later and the stock began to rise and I sold it 2 years later when it was back near $70.00. I stayed in the Navy, finished my four year degree while in the Navy. I went to work after retiring from the Navy in 1993. Went to work for a retailer who had one store and open 32 over the next 24 years. In 2001 I was promoted to Vice President of Computer Systems division of that company. I retired from that company in 2014, age 64, still married to the same wonderful women. We carry zero debt and money is not a worry during our retirement years…My wife took SS at age 66 and I took it at 70 which we maxed it out. Even if SS were to go away today we are financially set because we:
1. Lived within our means…( Not going into debt)
2. We both maxed out our retirement money in 401Ks during the 1990’s
3. We never touched/dipped into it ever. (We spent it on our retirement)
4. Taking RMD’s as required and still making over 100K yearly off of interest an military pension without adding in the SS.
Saving early, self taught finance, self control and working hard made us financially set for life…
Thanks for sharing, BLS!