Although you may try to plan for your ideal retirement, life is full of surprises. The reality is that most Americans (58%) end up retiring earlier than expected, with the median retirement age being 62, according to Transamerica research.
This often results in older adults or those in their late 50s and early 60s withdrawing too much money from retirement accounts too quickly.
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“Dipping into your hard-earned retirement savings for the first time is exciting,” said Connor Pastor, vice president and banker at J.P. Morgan Private Bank in Chicago. “But you need to choose wisely when and how you do it.”
GOBankingRates spoke with Pastor further to explain why many seniors are withdrawing their retirement funds early and how they can better manage their withdrawals.
In many cases, individuals begin withdrawing money from their retirement funds when they have a good reason to withdraw early.
“The two most common reasons why workers withdraw money from retirement accounts are job loss and medical hardship,” Pastor said.
As a result of losing their jobs later in their careers, many workers end up deciding to retire earlier than planned. Some people may take advantage of the “55 rule” or the “55 rule.” He explains that you can take penalty-free retirement plan withdrawals from your employer plan if you leave that particular job in the year you turn 55 or older (before the normal age of 59 1/2 for penalty-free retirement account withdrawals).
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However, “just because you can tap into retirement funds, doesn’t mean you should. Generally speaking, the longer you wait to withdraw, the better your results will be,” Pastor said.
Medical hardship is also a major reason for dipping into retirement funds prematurely. Here, just because you may qualify for a penalty exemption, doesn’t mean you should.
“If qualified medical expenses exceed 7.5% of your adjusted gross income, you can avoid the 10% early withdrawal penalty. However, it’s important to remember that no repayments are allowed,” Pastor explains. “The bottom line is, it’s much more difficult to put a lot of assets into a retirement account than it is to take those assets out.”
While you can’t always plan exactly when you’ll retire, that doesn’t mean retirement planning is futile by any means. Instead, it is important to build in some flexibility and be able to adapt to changing circumstances.
Even if you don’t retire early, many seniors still withdraw from their retirement savings too early because they don’t optimize their different financial goals. The first source of retirement income may seem like an account like a 401(k) plan or IRA, but that’s not always the case.
“Because retirement accounts are tax-advantaged, offering tax-deferred growth for traditional accounts and tax-free withdrawals for Roth accounts, the best thing a retirement account owner can do to compound wealth in retirement is to invest in high-quality assets within the retirement account for as long as possible,” Pastor said.
“Time is your friend when it comes to investing, and the longer you can stay invested without paying income tax or capital gains tax, the better,” he added.
Instead, even if you can make penalty-free retirement withdrawals, consider whether it makes sense to withdraw from other sources, such as a taxable brokerage account. Or, maybe it makes sense to work part-time and tap into savings over a few years so that you can compound your retirement accounts enough to comfortably support you for the rest of retirement.
“Having a thorough financial planning conversation with a tax or financial professional is the best way to determine whether it makes sense to withdraw money from retirement funds versus taxable assets to pay for living expenses and achieve financial goals,” Pastor notes. “Remember, the devil is in the details. When having a financial planning conversation, it’s important to provide copies of all account statements—retirement accounts, savings accounts, and brokerage accounts.”
From there, you can identify strategies that support your lifestyle now and into the future, which often means delaying retirement account withdrawals.
“It’s important for retirement account owners to think of their retirement accounts as engines of wealth growth,” Pastor explains. “The bigger the engine, the faster wealth grows. Use your retirement accounts carefully and know which bucket to draw from when planning for retirement.”
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This article originally appeared on GOBankingRates.com: I’m a J.P. Morgan Advisor: Why so many seniors withdraw their retirement funds prematurely