What is a retirement saver’s worst mistake? Many people are saving for retirement. In fact our government encourages us to save for retirement. Their sole objective is ensuring that we do not end up in poverty once we retire. They also have a variety of programs that allow consumers to borrow against their retirement savings. They can be use the money for a down payment on a home. In some cases 1st time buyers can withdraw money from a savings plan to use the funds as a down payment for a home. Home ownership is an important thing to do for many consumers. But taking money from your retirement savings plan could be one of your worst mistakes. Can you replace the income that this investment would generate once you retire? This is the key question that many people do not give much thought to.
Retirement Saver’s Worst Mistake
If you borrow or remove money from your retirement savings plan it can become a mistake. If you are unable to repay this loan you are jeopardizing your retirement. When you repay the loan from your retirement savings plan, savers lose the interest / dividend income that you would have accrued if the money had been left in the plan.
Savers who borrow money from retirement savings plan should treat it as a real loan. Repay not only the principle, but also the income that they lost as a result of the investment not being available to earn income.
Even just borrowing ten thousand to use as a down payment for your home purchase can make a huge difference in your total savings especially if you have a long time to retirement. The miracle of compounding can make a huge difference to savers. The total amount you have for retirement when you finally do retire will increase substantially.
If you must borrow from your retirement savings plan for a down payment on a home or some kind of emergency, develop a plan to repay the loan along with interest. Sometimes people are better off just arranging for a regular loan instead of borrowing from their retirement savings plan.
Discuss your options with a financial planner before making this decision to ensure that you consider a number of options. If you are good with spreadsheets, you can model the impact of borrowing the money vs. taking some of the money from your retirement plan. Completed properly this will quickly show the impact of both scenarios for your particular situation. If you are not good with this sort of thing, your investment adviser may be willing to help you with these calculations.