I’m a JP Morgan Advisor: Why So Many Seniors Are Withdrawing Retirement Funds Too Early
Written by
Jake Safane
Edited by
Zuri Anderson
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Try as you might to plan your ideal retirement, life is full of surprises. The reality is that the majority of Americans — 58% — end up retiring earlier than expected, with the median retirement age being 62, according to Transamerica research.
That often results in seniors or those in their late 50s and early 60s pulling too much money out of their retirement accounts too quickly.
“It’s exciting to tap your hard-earned retirement savings for the first time. However, you need to be smart about when and how you do it,” said Connor Pastoor, a vice president and banker at J.P. Morgan Private Bank in Chicago.
GOBankingRates spoke further with Pastoor to unpack why many seniors are tapping into their retirement funds early, and what they can do manage their withdrawals better.
Why People Pulls From Their Retirement Funds Early
In many cases, individuals start pulling from their retirement funds when they have eligible reasons for making early withdrawals.
“The two most common reasons workers make withdrawals from their retirement accounts are unemployment and medical hardship,” said Pastoor.
With a job loss late in their careers, many workers end up deciding to retire earlier than planned. Some might then take advantage of the “rule of 55” or “age 55 rule.” That allows for penalty-free retirement plan withdrawals from an employer plan if you leave that particular job the year you turn 55 or older, before the normal 59 ½ age at which you can make penalty-free retirement account withdrawals, he explained.
Yet, “just because you can access your retirement funds, it doesn’t mean you should. Generally, the longer you can wait to withdraw, the better your results will be,” said Pastoor.
Medical hardships are also a top cause of tapping retirement funds too early. Here too, just because you may be eligible for penalty-free withdrawals doesn’t mean you should.
“You can avoid the 10% early withdrawal penalty on the amount of qualified medical expenses that exceeds 7.5% of your adjusted gross income. However, it’s important to remember that repayments are not allowed,” Pastoor explained. “It’s ultimately much harder to contribute significant assets to a retirement account than it is to take those assets out.”
Optimizing Retirement Withdrawals
Although you can’t always plan exactly when you’ll retire, that doesn’t mean retirement planning is fruitless by any means. Instead, it’s important to build in some flexibility and be able to adapt to changing circumstances.
Even if you’re not retiring early, many seniors still end up withdrawing retirement funds too early because they’re not optimizing different financial buckets. It might seem like the first place to turn to for income in retirement is an account like your 401(k) plan or IRA, but that isn’t always the case.
“Since retirement accounts are tax advantaged, offering tax-deferred growth for traditional accounts or tax-free withdrawals for Roth accounts, the best thing the owner of a retirement account can do to compound their wealth in retirement is to stay invested in high-quality assets within their retirement accounts for as long as possible,” said Pastoor.
“Time is your friend when it comes to investing, and the longer you stay invested without paying income taxes or capital gains taxes, the better,” he added.
Instead, even after you can make penalty-free retirement withdrawals, consider whether it makes sense to pull from other sources like taxable brokerage accounts. Or maybe working part-time and leveraging savings makes sense for a few years so that you can let your retirement accounts compound enough to support the rest of your retirement comfortably.
“A holistic financial planning conversation with a tax or financial professional is the best way to determine if it makes sense to pull from retirement funds versus taxable assets to cover your living expenses and meet your financial goals,” noted Pastoor. “Remember, the devil is in the details. During a financial planning conversation, it’s important to have copies of all your account statements — retirement, savings and brokerage accounts — present.”
From there, you can determine a strategy that supports your lifestyle both now and in the future, which often means delaying retirement account withdrawals.
“It’s important for retirement account owners to think of their retirement accounts as an engine for growing wealth,” Pastoor explained. “The bigger the engine, the faster wealth will grow. Tap your retirement accounts sparingly and be cognizant of which bucket to pull from when planning your retirement.”
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