3 in 10 Workers Tapped Their Retirement Savings in 2023 for This Unfortunate Reason

It's fair to say that 2023 was a tough year for a lot of people. Inflation was still rampant, and that made it difficult for a lot of folks to cover their bills or handle surprise expenses.

A late 2023 survey by Betterment at Work found that 31% of workers experienced moderate to significant financial instability in 2023. Also, 30% wound up taking money out of their retirement savings to pay for short-term expenses.

But tapping your IRA or 401(k) to cover near-term expenses is seriously bad news. If you continue on that path, you risk a host of unfavorable consequences.

The problem with raiding your retirement savings

There are a couple of issues with taking an IRA or 401(k) withdrawal for non-retirement purposes. First, if you're not yet 59 1/2 years old, you'll risk a 10% penalty on the sum you remove.

But more so than that, any funds you remove from a retirement account ahead of retirement are funds you won't have on hand in retirement. And that could leave you with a major shortfall.

Remember, too, that when you take an early retirement plan withdrawal, you don't just lose out on the principal sum you remove. You also forgo investment gains on that sum.

So let's say you take a $5,000 IRA withdrawal when you're 35 years away from retirement. If your IRA normally gives you a 10% yearly return on your money, which is consistent with the stock market's long-term average, then that withdrawal could end up costing you more like $140,000 when you account for lost gains. That's a lot of retirement cash to give up.

There's a much better way to cover near-term expenses

You don't want to work hard to build retirement savings only to keep raiding your IRA or 401(k) when unplanned bills come up. So rather than whittle down your nest egg and risk penalties, build yourself an emergency fund.

As a general rule, you should aim to keep enough money in your savings account to pay for three full months of essential bills. That way, if you were to lose your job, you'd have cash reserves to cover your monthly costs in the absence of a paycheck.

Your emergency fund should also serve as your go-to source of cash when an expense arises that's out of the ordinary and your regular paycheck can't cover it. Let's say you normally spend $300 a month on home maintenance and repairs, only one month, you run into an issue that costs $800 to fix. You may not have the extra $500 readily available. But rather than tap your retirement savings, in that situation, you'd want to tap your emergency fund instead.

All told, a solid emergency fund could be your ticket to a financially secure retirement. If you can leave your long-term savings alone, there's a greater chance that down the line, you'll have the money you need to live comfortably. Keep tapping your nest egg for short-term bills, and you may wind up very sorry for it once your career comes to an end.