More Than 1 in 3 Women Have Tapped Their Retirement Savings Early. Here's Why That's a Costly Mistake

The whole purpose of building retirement savings is to have money to fall back on later in life, when you're no longer working and bringing a steady paycheck home. But recent data from the Transamerica Center for Retirement Studies finds that 36% of women have taken a loan, an early withdrawal, or a hardship withdrawal from their 401(k) or IRA. Going that route, however, could cost you in more ways than one.

It's not just a matter of being penalized

Generally speaking, taking an IRA or 401(k) withdrawal before age 59 1/2 means losing 10% of the sum you remove to a penalty. So if you withdraw $10,000 to fix your HVAC system or make big repairs to your car, you lose $1,000 of that automatically.

Now, there are some exceptions to this rule. Early IRA withdrawals of up to $10,000 are allowed penalty free to buy a first-time home. You can similarly tap an IRA early without a penalty to pay for college.

But the problem with raiding an IRA or 401(k) ahead of retirement extends far beyond a 10% penalty. The more money you remove ahead of retirement, the less you'll have in retirement.

And remember, any sum you take out of your IRA or 401(k) plan is money you no longer get to invest. Over time, lost investment gains could far exceed any penalty you're hit with.

The stock market has returned an average annual 10% over the past 50 years. So let's say you remove $10,000 from your 401(k) at age 30 to fix up your home or car. You'll lose $1,000 to a penalty, which isn't great.

But imagine you could've invested that $10,000 at 10% a year through age 65. When you think about it that way, your $10,000 withdrawal could mean retiring with about $281,000 less. In that context, the $1,000 penalty you're looking at is negligible. The bigger problem is the shortfall you're left with for losing out on years of growth.

Build an emergency fund so you don't need to tap your retirement savings

Many people end up raiding their IRAs or 401(k)s prematurely because they don't have emergency savings to fall back on. In fact, the aforementioned survey found that women only have a median of $2,400 in emergency savings. That may be enough to cover a modest home or car repair in some cases -- but not a major one.

Also, a sum of $2,400 probably isn't enough to pay all of your essential bills during a months-long period of unemployment. So if you want to keep your nest egg intact and avoid a financial shortfall later in life, it's a good idea to focus on building up your emergency cash reserves. At a minimum, you should aim for a large enough balance to cover three full months of essential living expenses.

Once you've done that, you can then focus on finding ways to add to your IRA or 401(k). But your goal should really be to set yourself up to not have to raid the long-term savings you've worked hard to build to date.