Please ensure Javascript is enabled for purposes of website accessibility

32% of Millennials Are Going to Regret This Investing Mistake When It's Time to Retire

By Kailey Hagen – Jul 26, 2020 at 7:47AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The money in your retirement account now has a greater value than you realize.

Retirement accounts are meant to be the home of our life savings, remaining untouched until we finally leave the workforce. But recent changes in the law have made accessing these funds easier and more affordable, so the millions of Americans affected by the coronavirus pandemic can use them to get through these challenging times.

It's a better strategy than allowing yourself to fall into debt, but it should still be a last resort. Most people understand this, but approximately 32% of millennials surveyed by TD Ameritrade didn't see it that way. Of those surveyed, 12% have already withdrawn from 401(k) accounts, while 20% more are considering it.They might not think anything of withdrawing their savings now when retirement is still decades away, but they'll probably regret it when they see how much more difficult they've made things for themselves. 

Frustrated young woman looking at laptop

Image source: Getty Images.

If you're considering withdrawing money from your retirement savings right now, here are a few things you should know first.

The real cost of early retirement withdrawals

Withdrawing $1,000 from your retirement account to help pay your bills doesn't seem like a big deal. After all, $1,000 won't cover very much now or in retirement. But you're not just taking out the $1,000, you're giving up all the potential earnings you could have on that $1,000 if you leave it alone.

If you leave that $1,000 in your retirement account for 30 years and it earns an average 7% annual rate of return during that time, it will be worth over $7,600. And if you leave it alone for 40 years, it will be worth nearly $15,000 with the same average annual rate of return. That's the real amount you give up when you take out that $1,000.

Your early retirement contributions (in the case of millennials, the ones they're making right now) matter the most because they have the most time to grow before you must withdraw them. If you put off retirement contributions until later, you'll need to set aside more of your own money to end up with the same amount by retirement because you won't be able to count on as much in earnings. 

That doesn't mean later retirement contributions aren't valuable, but making regular contributions while you're young and avoiding early withdrawals will make saving enough for retirement much easier.

The market downturn complicates all of this a little further because many people have seen their retirement portfolios drop since the beginning of the year. So withdrawing $1,000 from your retirement savings probably means selling a greater share of your assets now than it would have if you'd tried to do so last year, and that could set you further behind.

This doesn't mean there's never a good reason to take an early withdrawal from your retirement savings. We're living through exceptional circumstances right now, and that could be your only real option. But you shouldn't look upon your retirement savings as a piggy bank you can draw upon whenever you need a little extra cash. 

Other ways to get the money you need

Before you tap your retirement savings, you should check if there are any other ways you can get the money you need. You might be eligible for unemployment benefits if you've lost your job. And if you have any money in a savings account, you should rely upon that first.

You might also qualify for some other types of government assistance or hardship-assistance programs with some of your creditors that would enable you to defer payments for a few months. This could give you extra time to come up with the cash you need so you don't have to dip into your retirement savings.

A side hustle could also be a valuable source of additional income. There are plenty of extra jobs you can do from home if you don't feel comfortable interacting with people right now. Just remember to set aside some money for taxes every month if you choose this route.

Your retirement savings might seem like a valuable source of funds right now, but if you can resist the temptation to use them, they'll end up being far more valuable later. Explore all of your other options first, and if you do withdraw money from your retirement savings, create a new retirement plan once you begin saving again to get yourself back on track.

The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.