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.
