Americans Aged 55 to 69 Are 4x More Likely to Take a Sizable 401(k) Withdrawal Than Those 70 or Older. But That's a Problem.

The whole purpose of saving in a 401(k) is to eventually have money to spend in retirement. So there's absolutely nothing wrong with taking withdrawals from a 401(k) later in life.

But data from Fidelity reveals that savers aged 55 to 69 are 4 times more likely to take a notable 401(k) withdrawal than those aged 70 and over. And in this context, Fidelity defines a notable withdrawal as 10% to 24% of a given plan's balance.

This data is not only surprising, but a bit unsettling. Here's why.

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The problem with younger savers tapping their 401(k)s

Perhaps the biggest issue with savers aged 55 to 69 tapping their 401(k)s is the potential for penalties. Penalty-free 401(k) withdrawals usually only become universally available at age 59 1/2.

However, it is worth noting that many savers can access their 401(k) funds without a penalty at a younger age, thanks to the rule of 55. The rule states that if you're separating from your employer in the calendar year you turn 55 or later, you can take a penalty-free 401(k) withdrawal from that employer's plan only. You can't access a former employer's retirement plan penalty-free at 55.

But even if we take penalties out of the equation, the reality is that seeing a much higher 401(k) plan withdrawal rate among people aged 55 to 69 compared to those 70 and over is alarming. For one thing, it may be indicative of early retirement rates, which many people can't afford. But withdrawing from a 401(k) in one's 50s could also lead to many years of lost investment gains.

Consider someone aged 55 who removes $20,000 from their 401(k). That withdrawal may be penalty-free. But let's say that this same 401(k) plan is also averaging a fairly conservative yearly return of 6%, which is well below the stock market's average. In that case, a $20,000 withdrawal could result in about $48,000 less in income by age 70.

The fact that savers aged 55 to 69 are more likely to tap a 401(k) to a large degree than older savers may indicate that a growing percentage of people are being forced into early retirement. That's not a conclusion that's drawn by Fidelity in the aforementioned report, but it's one that may be applicable.

It's best to leave your 401(k) alone

If you're going to make an effort to save for retirement, whether in a 401(k), an IRA, or another plan type, it's best to try to leave that money alone as long as possible. Americans are living longer these days, and you never know when you might need your savings to last for a decades-long period. You're less likely to run out of money as a retiree if you don't take a large withdrawal from savings in your mid-50s through late 60s.

If you're still working once you reach age 59 1/2, don't rush to tap your 401(k) just because you can. You may be tempted to take a larger withdrawal to complete the kitchen renovation you've been dreaming of, or to upgrade your car. But that's a decision you might sorely regret if it leaves you short on retirement income -- income you might need for truly essential expenses -- later in life.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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