With the economy showing signs of a downturn and prices still running scalding hot, many Americans may feel like they’re lodged between a rock and another rock. And the paper they’re earning just isn’t cutting it.
Which is where raiding the 401(k) comes in: something that sounds attractive in the short term but makes no sense in the long run.
Financial experts of all stripes discourage it — and yet more Americans are now drawn to these withdrawals. About 0.5% of workers took a hardship distribution in October, according to Vanguard Group, which tracks 5 million savers. This represents a record high of about 25,000 workers. Mind you, markets worldwide hit a major skid in October and the previous month erased gains so many investors had taken for granted.
Though 25,000 may seem small, Vanguard says it’s seen nothing like it since it began tracking the data in 2004. And with the Federal Reserve showing no signs of halting its interest rate hikes — even as inflation rages unabated — you can expect hardship withdrawals to grow in the months ahead.
Yet non-hardship withdrawals also hit a record high in October at 0.9%, according to Vanguard. This kind of statistic makes financial advisers bang their heads against the wall — as the consequences for taking out money prematurely are often dire.
Workers under 59 1/2 will owe a 10% tax penalty on 401(k) withdrawals, on top of an income tax on pretax savings. And unlike a 401(k) loan, you can’t pay back a hardship distribution; the savings are lost forever, unless you can make them up with accelerated contributions.
If a retirement account is about patience, premature withdrawals represent the opposite — grabbing nest egg money without thinking through the alternatives. Consider these three options to preserve your funds instead.
Warm up to a spending freeze
Many people cut their spending in retirement to some extent. But if you’re in dire enough shape to raid the 401(k), then maybe it’s time to look at a spending freeze.
We’ve all read articles about cutting out Starbucks, so let’s skip that: A thoughtful freeze means combing your accounts for higher-ticket superfluous spending, from unused subscriptions and memberships to expensive car insurance or services you don’t need. (Can the landscaper or house cleaner come half as often?)
That first level of a spending freeze can be far less painful than you think: You’re essentially rooting out waste. The next level may force you to make some tough decisions — cutting the restaurant budget, for example — but you can still achieve it without getting deprivational. What if you ate out just as much but at restaurants that cost half as much? (This is where online ratings websites can help you find some true gems.)
Now, cut the amount of times you eat out in half and you’re talking a 75% reduction in restaurant expenses. Or BYOB. There’s no reason anyone with a WiFi connection can’t research excellent wines for under $10 a bottle, the cost of just a glass at many restaurants.
If you want (or need) to take your freeze to more extreme levels, it’s important not to cut all discretionary spending at once. If you make yourself miserable by eliminating too many things you love, your freeze will likely be impossible to sustain. Instead, look at thoughtful, even fun substitutions — a night out bowling instead of spending $500 at a major league game, for example.
Read more: Here’s how much the average American 60-year-old holds in retirement savings — how does your nest egg compare?
Make your cash less liquid
If you’re worried that you’ll still be tempted to spend, it’s smart to make your money harder to access. In large part, we’re talking about protecting the discretionary funds you might use for impulse purchases.
With a basic money market fund or investment app, you can set automatic withdrawals from your checking or savings account. The money then goes to a place where your debit card or mobile wallet can’t tap it in seconds. It also buys time to ask yourself, “Do I really need this?” Think of it as a barrier to prevent you from spending beyond your budget.
By doing this, you’ll also regain the self-control American consumerism works to strip away from us every minute of every day. Delayed gratification is key to making healthy decisions of every kind.
Create extra income
If money is an important resource, time is even more so. If you’re as prone to wasting time as wasting cash — and we all are, at times — it’s probably a good idea to trade in all your online shopping hours for a part-time job, which will give you financial breathing room two ways.
With spring cleaning season around the corner, you might want to take a look at items that only take up space in your home and sell them. In this case, who wouldn’t want to trade in an overstuffed basement for an overstuffed wallet?
Speaking of your basement — or attic, or primo parking spot — it might be a good time to look at renting those spaces. Also, see if there are ways you can collect finder’s fees for sending business to people you know: The best kind of income is passive.
Don’t give up — unless it’s waste
Times are indeed tough for many, many Americans watching inflation turn their paychecks into toilet paper. If you’re in that category, the most important thing to preserve, along with your 401(k), is your positivity. To find money, you have to first believe you’ll find a way.
Also keep in mind the common denominator among many people who tap their 401(k) accounts prematurely: waste. Are you wasting your money on things you don’t need? Wasting your time shopping when you could be earning? Wasting chances to painlessly cut and create passive earnings?
If this sounds like you, there’s no need to beat yourself up. Use that energy to start now. And remember, this is hard to do alone — which is what financial advisers and money-savvy friends are for.
