Source: Federal Reserve Bank of New York. 

Saving for retirement is nowhere near as easy as you think it is before entering the workforce.

Many of us probably believe that retirement entails saving money, investing for the future, and that everything will eventually fall into place, no questions asked. Unfortunately, that's rarely how the world works. Life throws us plenty of twists and turns along the way, such as unexpected expenses, the high costs associated with starting a family, or even the rising costs of buying a house or going to college. By the time we retire we often realize that our road to retirement was filled with twists and hairpin turns.

However, according to a recently published report from Bankrate, millions of Americans could unknowingly be making it even more difficult to hit their retirement number.

30 million Americans just got caught red-handed
The September Financial Security Index from Bankrate analyzed the responses of 1,004 adults to determine what percentage were pilfering their retirement accounts to pay for emergency expenses, such as a large medical bill.

If there was a bright side to the report, it was that the percentage of respondents that admitted to raiding their retirement accounts for emergency cash dropped from the last FSI survey focusing on this topic in 2011. The implication would be that at least some people are doing a better job of budgeting for emergencies and/or not tapping their retirement accounts when an emergency arises.


Source: Social Security Administration.

That aside, the numbers still weren't good. Bankrate's survey showed that 13% of adults tap their retirement accounts to help pay for financial emergencies. It may not sound like a lot percentage-wise, but that still works out to about 30 million Americans. Further, the difference became more pronounced as people got older. Just 8% of millennials affirmed that they raid their retirement accounts to pay for financial emergencies compared to 17% of adults between the ages of 50 and 64, and 19% of adults aged 65 and up.

Essentially "robbing" your retirement savings to pay for a current expense is a potentially huge problem that could compound into a lot of lost earning potential over the long run. As an example, imagine that a 25-year-old had to remove $5,000 from their retirement savings in order to pay an unexpected medical bill. From the moment our fictitious millennial removes the $5,000 and going forward he or she loses out on the potential income that money could have generated in future investments. Based on the stock markets' historic growth rate of 8%, after a decade the original $5,000 would be worth more than $9,600. After two decades our fictitious individual would have given up on $18,600. By the time he or she retires at age 65 that $5,000 withdrawal would have been worth nearly $70,000!

The other issue is that taking money out of a retirement account early without a qualified reason could result in a hefty penalty for the consumer.

Simply put, an estimated 30 million of you have been caught red-handed of potentially robbing yourselves of a comfortable retirement.


Source: Social Security Administration.

Why 30 million people are making this mistake
You might be wondering why so many people are raiding their retirement savings to help pay for large unexpected expenses. I suspect the answer boils down to two issues.

First, Americans have a serious saving problem. The personal savings rate for U.S. adults is well below that of other developed countries, and the result is that far too few Americans are saving enough to adequately fund their retirement or emergency savings.

A similar study conducted by Bankrate last year showed that only 23% of respondents had enough capital saved in short-term assets, such as a savings account or money market account, to meet up to six months of expenses. Around a quarter of respondents admitted to having no emergency savings whatsoever, while another quarter had enough capital to cover three months of expenses or less. In Bankrate's September FSI, around 10% of respondents noted that they didn't have a dime in emergency savings. With little in short-term liquid capital, some consumers have no choice but to turn to their retirement savings.

The other issue is a matter of perception. Baby boomers and seniors often have considerably larger nest eggs saved up compared to millennials, meaning it's a lot less of a shock when they remove money from their retirement savings than a millennial. Additionally, seniors are more prone to illness and higher medical costs, so it's not all too surprising that around one in eight Americans (and especially seniors) need to dip into their savings in order to cover unexpected expenses.


Source: Federal Reserve Bank of New York.

Here's how this mistake can be corrected
It's painfully obvious that change is needed to prevent adults of all ages from raiding their retirement and hindering their chances of a comfortable retirement.

The first step (and it's often the first step to solving many financial miscues) is for consumers to get a better bead on their cash flow. If someone doesn't have a good understanding on where their money is being spent each month, then it's practically impossible to optimally save money. The solution is to formulate a budget that can be reviewed monthly so that you can get a feel for your spending habits and sock away as much money toward your retirement as possible.

As an addendum, though, it's just as important that consumers have back-up capital to cover six to eight months of expenses in case of an emergency (e.g., medical bill) or life change (e.g., loss of job). The best course of action here is to separate your emergency cash from your retirement funds so there are clearly defined assets that are "off-limits" and out of your reach in the short-term. An idea here would be to place your short-term funds in savings or money market account, or perhaps even in a highly liquid electronic-traded fund, or ETF.

The other important tactic is to consider smarter sources of capital than a retirement fund for emergencies. Bankrate notes that many financial planners suggest using a HELOC or personal loan as a means to pay for a financial emergency. Borrowing money from a friend or family member (assuming they can afford it) may not be ideal, but it's a far better scenario than stealing from your retirement account.

An intriguing idea, as long as you know you'll pay the money back, is to consider taking a loan out against your employer-sponsored 401(k). Loans against a 401(k) are charged interest like any loan you'd take out from the bank, but here's the best part: the interest goes right back in your pocket. Understand that while a 401(k) loan might appear to be low-cost, removing that money (even temporarily) from your retirement account could cost you long-term compounding gains.

Ultimately, it boils down to the simple fact that you alone are responsible for the success or failure of reaching your retirement number. If you want to improve your chances of a comfortable retirement, and you currently find yourself among the 30 million dipping into your retirement savings, then consider taking Bankrate's survey and today's advice to heart.

Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

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