Everyone seems to be making the same money mistake right now — and most don’t even realize it’s happening. It’s one of those habits that sneaks in quietly, feels harmless at first and then suddenly leaves a bigger dent in your personal finances than you expected. The worst part? It’s so common right now that it barely even feels like a mistake.
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The good news is, with some key strategies, it’s easy to turn things around and start keeping more of your hard-earned cash where it belongs — in your account.
Below we explore the mistake of drawing early from your retirement savings and what to do instead.
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Tapping Into Your Retirement Savings Early
According to Andreas Jones, founder of KindaFrugal, tapping into your retirement savings early, whether you do it through a loan or a withdrawal, might seem like a good idea if money’s tight, but more often than not it’s only going to do more harm than good in the long run.
And right now, everyone is doing it. The Wall Street Journal even said the 401(k) has become America’s rainy-day fund.
Jones observed that if you’re under 59.5 and take a withdrawal from a pension or retirement fund like a SIPP (self-invested personal pension), you’ll usually be hit with an income tax charge and potentially a 55% tax if the withdrawal exceeds your available lifetime allowance or isn’t part of a recognized flexible drawdown.
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On top of that, with workplace pensions, early access might not even be an option unless you’re facing serious ill health and if you do manage to take anything out, you risk derailing your long-term plans.
“You’re not just losing the money you take, you’re also losing all the growth that money could have generated over time,” Jones added.
Interrupting the Compounding Effect Comes With a Cost
Experts agreed that the compounding effect is what makes pensions so powerful and interrupting it comes at a cost.
Andrew Lokenauth, money expert and owner of BeFluentInFinance, equally observed that this is the one big money move many folks are making right now.
“I’ve seen way too many people raiding their retirement accounts lately — and it’s making me cringe,” Lokenauth added.
Last month, he watched a close friend pull $30,000 from his 401(k) to cover some credit card debt.
Big mistake, according to Lokenauth. His friend is now stuck paying back that loan with after-tax dollars (meaning he’s essentially getting taxed twice on that money), plus he’s missing out on all the compound growth that cash could’ve earned.
Like Jones, Lokenauth noted the penalties are brutal too. “From my experience working with retirement planning, early withdrawals before age 59.5 typically cost you a 10% penalty + regular income taxes.
So on a $10,000 withdrawal, you could easily lose $3,000 to $4,000 right off the top.
“That’s thousands of dollars — just gone,” Lokenauth said.
But here’s what really kills him about retirement account loans — you’re stealing from your future self.
“I did some calculations recently and a $20,000 loan in your 30s could mean $100,000+ less in retirement — thanks to lost compound growth. Those numbers hit me hard,” he added.
What To Try Before Touching Retirement Money
Lokenauth has found several better options through his own financial planning work.
First, negotiate with creditors — he managed to get three credit card companies to lower his clients’ interest rates just by calling and asking.
“Sometimes they’ll even offer hardship programs with temporarily reduced payments,” Lokenauth explained.
Selling stuff works too. When he needed quick cash, he went through his garage and made about $2,000 on Facebook Marketplace in one weekend.
And don’t forget picking up temporary side work — Lokenauth said he knows someone who drives for DoorDash just two nights a week and pulls in an extra $400 to 500 monthly.
For bigger money needs, a personal loan from your local credit union might work. Their rates tend to be way better than credit cards.
“I’ve seen some as low as 7% to 8% compared to 20% plus on cards,” he added.
When Retirement Withdrawals Might Actually Make Sense
Sometimes — rarely — tapping retirement funds can be the right call, Lokenauth said. Like if you’re facing foreclosure or eviction and have zero other options. Or dealing with a legit medical emergency that’ll wreck your credit if unpaid.
“But here’s my firm stance: It should be absolute last resort territory,” he added.
And even then, he said loans are usually better than withdrawals since you’re forced to repay the money — protecting your future self.
The Hidden Costs Nobody Talks About
Beyond the obvious penalties, there are sneaky consequences.
Your retirement loan payments are usually deducted from your paycheck — but if you leave your job, that whole loan typically becomes due within 60 days.
“I’ve seen people get caught in this trap,” Lokenauth said.
Plus he said there’s opportunity cost. The market’s been volatile lately, but historically it returns about 8% to 10% annually. That’s growth you’re missing out on. And with compound interest, even small withdrawals now can mean huge losses down the road.
From Lokenauth’s calculations, someone who takes a $30,000 retirement loan in their 30s and repays it over five years, could end up with $200,000 (or more) less at retirement age.
“The numbers are staggering when you really break them down,” he said.
“I know times are tough — trust me, I get it — but raiding your retirement should be an absolute last resort. Your future self will thank you for finding another way,” Lokenauth added.
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Sources
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Andreas Jones, KindaFrugal.
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Andrew Lokenauth, BeFluentInFinance.
This article originally appeared on GOBankingRates.com: 1 Bad Money Move Everyone Is Making Right Now (and How To Stop Doing It)
