I Used to Think 59 1/2 Was the Best Age to Start Withdrawing From a 401(k). Here's Why I've Changed My Tune.

I'll admit that my first bunch of 401(k) plan contributions were ones I made grudgingly. Back in my 20s, I pretty much hated the idea of parting with money I could've been spending on near-term expenses, or even leisure.

After all, I had a demanding job in finance and felt I deserved to spend more of my money -- not sock it away for decades. But because I recognized the importance of funding a 401(k) and wanted the tax benefits, I powered through.

My one consolation prize back then was telling myself that I'd start raiding my 401(k) as soon as I was able to do so penalty-free -- meaning, at age 59 1/2. But I've since changed my tune and realized that starting to withdraw from a 401(k) plan at that young an age could have seriously unfavorable consequences.

A person at a laptop with a serious expression.

Image source: Getty Images.

When you put yourself at risk of running out of money

The fact that Americans are generally living longer these days is a good thing. But it does pose a financial challenge.

Now, people who retire at an average age have to anticipate needing 30 years of income -- sometimes more. That's a challenging thing, as it can turn an otherwise large sum of money into a seemingly small one on an annual basis.

Take a $1 million 401(k). That sure seems like a lot of money. But if you withdraw from a sum like that at a rate of 4% year, which is a withdrawal rate experts have long touted, you get just $40,000 of annual income.

Now that may be enough to live a reasonably comfortable lifestyle, especially when combined with Social Security. But you're also not exactly living large on $40,000 a year.

And that ties into my change of heart with regard to 401(k) withdrawals. If you start tapping your retirement savings in your late 50s, you may put yourself at risk of running out of money down the line.

The 4% rule referenced above is designed to make your savings last for 30 years. But if you start tapping a 401(k) at age 59 1/2 and live until 95, you might spend the last five years and change of your retirement having to live on Social Security alone if you stick to that strategy.

Or, what you might have to do instead is commit to a smaller withdrawal rate to make your savings last. But that, in turns, leaves you with less annual income. So there's a drawback either way.

Plan to work longer -- and wait to start touching your savings

If your job is an utterly miserable one, then you may decide that it's worth tapping your retirement plan at age 59 1/2 to escape that awful situation. But if that's not the case, then it definitely pays to consider working well into your 60s and leaving your savings alone all the while.

Of course, if you start taking 401(k) withdrawals at age 65 and use the 4% rule, you might still run into a financial issue if you happen to be someone who lives until 100. But for the most part, you're generally safer starting to tap your nest egg in your mid or late 60s than age 59 1/2. So even though you can access your money penalty-free at that age, that doesn't mean it's the right time to pounce.

What stocks should you add to your retirement portfolio?

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now. The 10 stocks that made the cut could produce monster returns in the coming years, potentially setting you up for a more prosperous retirement.

Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $544,015!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

The Motley Fool has a disclosure policy.

 

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

More Related Articles

Info icon

This data feed is not available at this time.

Sign up for the TradeTalks newsletter to receive your weekly dose of trading news, trends and education. Delivered Wednesdays.