Life happens. Cars break down. Ankles get sprained. There will always be “emergencies” that can set you back financially, but you don’t want to compound the damage by tapping your retirement savings to pay for them. Thirty million Americans used their retirement nest egg for an emergency in 2015, according to Bankrate — that’s one in eight. Your retirement savings is there for one thing: retirement. Anything else you do with it will affect your long-term goals and your ability to live the way you want to when you reach your golden years.
WITHDRAW MONEY AND IT’S GONE
Retirement savings can be tax-advantaged, depending on the type of account. But withdrawals from these accounts can have tax ramifications that need to be taken into account. For example, withdrawals from individual retirement accounts before age 59 1/2 typically trigger a 10 percent early withdrawal penalty, in addition to ordinary income tax you may owe. It may not seem like a big deal when you need cash now, but that money you took out is gone and so is all the gain it could have potentially earned by staying invested.
IT COULD LEAVE YOU SHORT IF THE UNEXPECTED HAPPENS
In a perfect world, you will work for as long as you want and then go off into retirement when you are ready. Unfortunately, for many people, that doesn’t happen. An illness or unexpected injury can force someone to exit the workforce earlier than planned. And if that person was using their retirement savings as a piggy bank to cover emergencies, they’re going to be in an even more precarious position. According to Fidelity, a 65-year-old couple who retired in 2015 is expected to need $245,000 on average (in today’s dollars) to cover health care costs in retirement.1
Let your retirement savings grow, and it will be there to help cover those costs.
YOU PASS ON YOUR PROBLEMS TO YOUR CHILDREN
For savers, amassing a sufficient amount of money to live off of in retirement means they won’t have to burden their adult children if they get sick or have other emergency needs. But if their savings are used for emergencies before they retire, seniors may be forced to turn to their children to help in a crisis. That, in turn, could put pressure on their adult children’s ability to save, thus creating a vicious cycle.
What you put away for retirement today is going to have a big impact on your life once you exit the workforce. It’s not far-fetched to live 30 years in retirement, which means you are going to need a nest egg that can help you throughout this lengthy period. While it may be tempting to tap into that nest egg for emergencies when retirement is years away, make every effort to fight that urge. Retirement savings should be just that — for retirement — and shouldn’t be used to cover costs today.
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2019-73405 Exp. 1/2021
1 2015 Fidelity analysis performed by its Benefits Consulting group. Estimate based on a hypothetical couple retiring in 2015, at 65 years old, with average life expectancies of 85 for a male and 87 for a female. Estimates are calculated for “average” retirees but may be more or less depending on actual health status, area of residence, and longevity. The Fidelity Retiree Health Care Costs Estimate assumes that individuals do not have employer-provided retiree health care coverage but do qualify for the federal government’s insurance program, Original Medicare. The calculation takes into account cost-sharing provisions (such as deductibles and coinsurance) associated with Medicare Part A and Part B (inpatient and outpatient medical insurance). It also considers Medicare Part D (prescription drug coverage) premiums and out-of-pocket costs, as well as certain services excluded by Original Medicare. The estimate does not include other health-related expenses, such as over-the-counter medications, most dental services, and long-term care. Life expectancies are based on research and analysis by Fidelity’s Benefits Consulting group and data from the Society of Actuaries, 2014.