When Is It OK to Tap Your Retirement Savings?

There’s a lot to weigh when deciding whether to crack open your nest egg. You spend your working years saving what you can for retirement, knowing you’ll one day take the money out. But things don’t always go according to plan. You might face a financial emergency before you’re retired, or the economy could enter a recession just as you’re about to leave the workforce. Problems like these can create a lot of uncertainty about whether it’s safe to withdraw your retirement savings and how much to take out at a time. Those decisions are ultimately up to you. But here are a few things you may want to know to help you with your choice.

In a perfect world

Ideally, you’d be able to leave your retirement savings alone until you’re ready to retire and are at least 59 1/2 years old. The government penalizes you for taking withdrawals from most retirement accounts before this age unless you have a qualifying reason, like a large medical expense or a first home purchase. In the best-case scenario, you’d also have a safe withdrawal strategy worked out based on your spending habits. Some people choose to follow the 4% rule or a variation of it, like the 3% rule. This tells you what percentage of your savings you can spend in the first year of your retirement. Then, you adjust it slightly every year thereafter to account for inflation. Others create a custom withdrawal strategy based on their spending habits. For example, they may decide to spend more in the early years of their retirement so they can travel and pursue hobbies, then less as they age and stay closer to home. Whatever your strategy, in a perfect world, you’d be able to follow it to the letter, with no unplanned expenses or investment losses to worry about. But that’s not how it usually works in practice.

In the real world

In reality, unexpected expenses happen to everyone, and they present unique challenges depending on where you’re at. When you’re under 59 1/2, as mentioned, you could face penalties for making early retirement account withdrawals. And when you’re already retired, you may have to alter your budget going forward so you don’t run out of savings prematurely. Building up emergency savings can make these unexpected costs a little easier to deal with. You may not need to tap your retirement savings early if you have an emergency fund. And if your nest egg has a little extra cushion in it, you might not have to worry as much about small bills or your investments taking a dip here and there. But you have to be willing to pivot when the situation demands it. Whether taking a retirement account withdrawal is the right move for you depends on your personal circumstances, but you can always benefit from comparing all the moves available to you. A thorough understanding of all your retirement accounts can help with this. For example, if you need money before 59 1/2, you might be able to avoid penalties by only withdrawing Roth contributions, which you’ve already paid taxes on. Or you could use the Rule of 55, assuming you’re old enough, to access some of your 401(k) funds penalty-free. Those who spend their nest egg faster than anticipated or who are worried about the effect a recession could have on their savings might have to consider reducing their withdrawal rate or seeking out alternative sources of income. This could mean returning to work part-time or renting out an extra property if you have one. And keep in mind that the right strategy for you could change over time.

Don’t forget about required minimum distributions

So far, we’ve focused on accessing your retirement savings when you need it, but eventually, you’ll likely be required to start pulling from your savings. Required minimum distributions (RMDs) are mandatory annual withdrawals the government forces you to take from all retirement accounts except Roth IRAs. The current law requires you to begin these in the year you turn 73. The size of your RMDs depends on your retirement account balance and your age, but they could amount to thousands of dollars per year. It’s not a big deal if you’re already making regular withdrawals from your retirement accounts, but if you haven’t started tapping these funds yet, it could be an inconvenience. However, skipping RMDs isn’t a wise move. Failure to take them results in a 25% penalty on the amount you should have withdrawn. Your retirement savings and withdrawal strategies will likely change over time. It’s a good idea to have a plan going into retirement, but continue to check in with yourself at least annually to see how that plan is working out and adapt as necessary. Stay up to date on the latest retirement account rule changes as well, in case one affects how you use your savings.