Why You Should Rethink Using Your Retirement Savings for Anything OTHER Than Retirement OR Should You Use Your Retirement Savings to Pay for College, Fund a Down Payment, Start a Business, or…Anything Else???

by Angela Melfi | Apr 18, 2023 | Financial Advice, Financial Planning, Investment Management

As the years go by and your paychecks keep coming in, you diligently save for retirement, even benefiting from your employer’s match. Every now and then, you check your account statement, and that growing nest egg sure looks impressive!

So, when it’s time to fund your child’s college education, make a down payment on your dream home, or launch the small business you’ve been pondering for years, you might wonder: “Should I dip into my retirement savings?”

Our expert advice? A resounding “no!”

We understand the temptation, and as financial advisors, we often encounter this question. Let’s explore why using your retirement savings for other purposes isn’t a wise decision.

Reason #1: Penalties

Cashing out your retirement account early comes with several penalties:

Early Withdrawal: Withdrawing from your 401(k) before age 59½ incurs a 10% penalty from the IRS.

Taxes: The IRS mandates a 20% tax withholding on most 401(k) withdrawals.

For example, withdrawing $10,000 for a house down payment would result in a $1,000 penalty and $2,000 in taxes, leaving you with just $7,000.

Pro Caveat: If you’re set on using your 401(k) for a down payment with no other options, consider converting it to an IRA. First-time homebuyers can withdraw $10,000 without the 10% penalty.

Reason #2: Lost Growth

Early withdrawals disrupt the compounding process and may leave you with a smaller nest egg than you anticipated, potentially affecting your quality of life in retirement.

Like all investments, your retirement account grows through contributions and the power of compounding. The larger the balance, the greater the compounding effect. What does that mean for you? Essentially, that you have to contribute less to earn more over time.

By withdrawing $100,000 for your child’s college tuition or to kickstart your own business, not only are you reducing your account balance, but you’re also sacrificing the compounding benefits that this sum would have provided—which means you’ll have to put more money in to see the same net result.

Here’s an example. Imagine you’re 45 years old with $250,000 in your retirement account when you decide to withdraw $100,000 for college or a new business. Your account now has $150,000, and assuming an 8% interest rate and no further contributions for the next 20 years, your balance at age 65 would be around $699,000. However, if you had maintained the original $250,000 balance with the same 8% rate and no additional contributions, you’d retire with approximately $1,165,000. This difference of about $466,000 could significantly alter your retirement lifestyle.

Reason #3: A Later Retirement Start Date

It should come as no surprise that early withdrawals can push your retirement finish line way back, because your account balance is such a large part of what determines your retirement readiness. When you remove a large portion of your savings, you risk not having enough money to maintain your current lifestyle in retirement. With increased life expectancies and the rising costs of healthcare and living expenses, it’s more important than ever to ensure that your retirement savings remain intact and continue to grow.

You don’t want to find yourself struggling to make ends meet in your later years or being forced to work longer than you initially planned. This can be a huge blow to your overall well-being and quality of life.

Financial Planning: An Alternative to Withdrawing from Your Retirement Account

We understand that considering an early withdrawal from your retirement account is likely driven by financial necessity or concerns about the economy. However, there are alternative options to explore. From initiating college savings plans early to establishing emergency funds, we’re here to help you manage your overall financial well-being and achieve your savings and retirement objectives.

If you require guidance in this area, we invite you to schedule a consultation. The support and expertise of a financial advisor can significantly impact your ability to preserve and grow your wealth for the future, as well as help you meet your cash flow needs today.

Are you on track for retirement?

Making sure you will be ready for retirement can be overwhelming. Funding your retirement accounts over the years is a critical part of your journey to the retirement of your dreams. An experienced Financial Advisor can help you navigate the complexities of investment management. Talk to a Financial Advisor>

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Platt Wealth Management offers financial plans to answer your important financial questions. Where are you? Where do you want to be? How can you get there? Our four-step financial planning process is designed to be a road map to get you where you want to go while providing flexibility to adapt to changes along the route. We offer stand alone plans or full wealth management plans that include our investment management services. Give us a call today to set up a complimentary review. 619-255-9554.

2023 1st Quarter Investment Management

by Angela Melfi | Apr 16, 2023 | Newsletter

Happy New Year!

The S&P 500 Index up by 7.5%.

Russel 1000 Growth was up 14.4 %

5 Year government securities are yielding 3.57%

1 Year treasuries are yielding 4.59%

The annual inflation rate in
the U.S. slowed to 5.4% and the unemployment rate remains at 3.5%.

Gains Soothe Recession Worries

We have now experienced two consecutive quarters of healthy market gains, and the long-predicted recession has not materialized despite the Fed continuing to raise interest rates. The S&P 500 index was up 7.5% in Q1. There was quite a style divergence, however, as the Russell 1000 Growth index was up 14.4% and the Russell 1000 Value index managed a gain of just over 1%. Meanwhile, the small cap index, the Russell 2000, posted a gain of just over 2.7%.

Foreign markets moved in lock-step with the U.S. The broad-based MSCI EAFE international index gained 7.7% in Q1. Emerging markets, as represented by the EAFE EM index, gained just over 3.5%.

Bonds: An Inverted Yield Curve

Bond rates rose dramatically last year, but that trend has moderated. The 30-year U.S. government bond yield is down from 3.96% at the end of last year to 3.65% currently, with the 10-year yielding 3.47%. Interestingly, 5-year government securities are yielding a higher 3.57% and 2-year Treasuries are yielding 4.03%, with 1-year issues yielding 4.59%. When short term rates are higher than longer term rates, particularly the 2-year compared to the 10-year note, this is called a yield curve inversion. An inverted yield curve is often a harbinger of a recession, as all modern-day recessions have been preceded by an inverted yield curve. However, not all inverted yield curves have led to recessions.

The Fed’s High Wire Act

For nearly the past 1.5 years the fed has raised rates nine times with a tenth increase expected this week to 5%-5.25%. This monetary policy tightening is the fastest in four decades, and the futures market is predicting that another increase is coming, too. The Fed is doing a high-wire act balancing its efforts to control inflation without disrupting the US economy. More economists are predicting a recession for the second half of this year.

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San Diego, CA 92108
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Of course, the recession of 2023 was previously predicted for 2021 and then pushed back to 2022. As it is often said, “An economist is an expert who will know tomorrow why the things he predicted yesterday didn’t happen today.”
The Fed recently released a report examining the failure of Silicon Valley Bank (SVB). In the report the Fed announced its mea culpa for the collapse of the bank citing its own lax oversight along with loosening regulations and poor management by SVB. While its candor is rare and much appreciated, it does not raise our confidence that it can orchestrate its projected soft landing. This is especially true as the Fed has prioritized fighting inflation at the expense of the economy.

The Economy Moves Forward

Even after all the rate hikes, the economy moves forward, albeit at a slower pace. GDP growth went from 2.6% in Q4 2022 to 1.1% in Q1 2023. Yet, unemployment remains at 3.5%, a number that does not assist in cooling the economy and bringing down the rate of inflation. Yes, inflation has slowed somewhat, from a peak of 9.1% to 5.4% over the past year, but it’s still well above the 2% target rate of the Fed. Increased rates and higher borrowing costs will slow the economy, eventually getting inflation down to the Feds target. It’s just taking longer than the Fed wants.

The future is always unknown, and the view ahead is unusually cloudy. Even so, the past two quarters may contain a hidden lesson. Taking actions based on market forecasts and recession predictions, particularly jumping in and out of markets, would have caused an investor to miss two quarters of healthy returns. Long-term investors who build and maintain portfolio asset allocations appropriate for their time horizon and risk tolerance come out ahead in the long-run.

WE ARE HERE FOR YOU

The New Year provides many great opportunities to get a financial plan in place or reevaluate your risk profile. The Platt Wealth Management team is here for you to discuss any changes or new milestones in your life. We are always available to assist you with any financial matters and we look forward to continue to serve you along your financial journey.

Warmest regards,
Platt Wealth Management