Expert Retirement Planning

The worst thing you can do as far as your retirement planning efforts are concerned is to borrow money from your 401(k) account to deal with unexpected living expense costs. Years ago, it was very difficult to borrow money out of your retirement accounts. Today, however, it's not difficult at all to dip into your retirement savings to pay for all types of things, emergency and otherwise.

Many people rationalize borrowing money out of their 401(k) plans by telling themselves things like:

• It's my money, I should be able to do what I want with it.
• I'm paying the money back to myself, with interest, so it isn't costing me anything in the long run.
• What's the harm in taking a few dollars out now when retirement is so far away?

Rationalizations like these indicate a basic lack of understanding of why saving for retirement is so important. There is a big difference in the money you pull from your 401(k) and the money you use to pay it back. You contributed pre-tax money to the fund, and you're paying it back, and the interest on it, with post-tax money.

Additionally, while you may feel that paying back the 401(k) loan will be easy because you have several years to repay it, things could change if you leave your job before the loan is repaid in full. You may plan to stay in the same job for several years, possibly even until retirement, but things can change.

You may get a better job offer, or your company may go out of business, or your position could be eliminated, to name just a few things that could result in a change in your employment status. Regardless of the reason, if you leave your current job, you could have to pay back the entire balance of your 401(k) loan within one or two months to avoid having to deal with an early withdrawal penalty and income tax.

No matter how you look at it, pulling money from your 401(k) can be very costly in the long run. It can cost you money now, impacting your current cash flow and making it difficult for you to continue saving for retirement. It can also cost you a significant amount of money when it's time for you to retire. When you pull money out of your retirement fund, you're potentially losing  thousands and thousands of dollars in interest over the life of the fund, depending on your age and financial status.

It's true that unexpected emergencies come up from time to time. That's the reason that it is so important to have an emergency fund set aside. You are much better off planning ahead for emergencies by setting aside money in a savings account rather than withdrawing from your 401(k), losing retirement earnings, and having to make loan payments to yourself for several years.