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Over the past several years, I have spoken to many people who have tapped into their 401k or other retirement accounts too soon. Some have done it to try and save homes from foreclosure, (only to lose them anyhow), others have done it to survive after losing a job, and others have done it for seemingly legitimate reasons such as funding their child’s college education. Others sadly, have done it for foolish reasons such as a vacation or paying off a car. Before I knew better, I pulled money out of my retirement when I should not have. I so regret many of the financial decisions I made in my 20’s because if I knew then what I know now, I might actually be retired already (and I am still in my 40’s). 🙂
People need to understand a few concepts about taking money out of their 401k early. Here are a few to consider:
The Power of Compound Interest
Compound interest is one of the most powerful financial forces in the universe, so you want it on your side. I am referring to the fact that the money that you put in your 401k will continue to grow exponentially and it accrues interest and that interest accrues interest. Over time this makes a huge difference. As an example, if you invest $200 per month in s a 401k after 10 years (for a total investment of roughly $24,000) you will have accrued roughly $37,000 assuming an 8 percent interest. If you invest the same $200 per month for the next 10 years, you will have put in roughly $48,000 which would be worth almost $120,000. Continuing the same pattern for the next 10 years you will have contributed roughly $72,000, however your balance would be a little over $300,000! By pulling any of this money out, not only are you missing out on the growth that only time can produce, but you are throwing about your money along with its growth because you will be subject to an early withdrawal fee (unless you have reached age 59 and a half.)
The Cost of An Early 401k Withdrawal.
Taking out retirement funds early from a 401k program usually incurs a 10% early withdrawal penalty as well as creating a taxable event, so you end up losing anywhere from 25% – 40% of your money.
Will You Outlive Your Retirement
It robs you of your much-needed retirement funds. Many people already fear of outliving their retirement, and this only makes that problem worse.
What if there was a way to use that money and recoup the losses from the taxes and penalty, still have it grow, AND have access to it after you have spent it?
There is! Through a process called infinite banking, you can transfer this money into a secure financial vehicle and by redirecting the flow of your money, you can rebuild this fund and recover any losses, PLUS continue to grow the funds for your retirement and use it again whenever you want without paying taxes or a penalty.