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One of the traits of wisdom is knowing that sometimes just because you can do something doesn’t mean you should. At my age I have many opportunities to give someone my advice, but just because I can doesn’t mean I should.
Gary Logan
Wes Shannon
Unsolicited advice is rarely appreciated or adhered to. Especially when it can come across to a younger person as condescending.
I like what Willie Nelson said about the advice he would give to his younger self: “Shut up.”
The nice thing about writing this article each month is that my advice is solicited, allowing me to share some hopefully helpful thoughts with you, my readers.
This year, the oldest Gen Xers are turning 59 1/2, which means they can withdraw from their retirement accounts (IRAs and 401(k)) without the extra tax penalty.
Well, just because you can doesn’t mean you should.
The most recent numbers show that about seven of 10 retirees were forced to retire earlier than they had planned because of circumstances outside of their control, according to research conducted by CBS News. Whatever balance you have accumulated in your retirement accounts will be needed for that time when you cannot work and there is a big chance you won’t have control of when that time comes.
At a reasonable growth rate of 7% your current balance at age 59 would almost double by the time you are 69 without any additional contributions. If you continue to contribute that amount could be three or four times at age 69.
Unless a person has accumulated enough to feel financially independent by age 59 1/2, I would recommend that they consider their retirement funds sacrosanct and not to be used except as a last resort.
Another alternative might be to borrow money against other assets. This could make more sense in most cases. Since the retirement funds are growing under tax-favored conditions the returns should be calculated net of taxes for comparisons. Most asset-based loans will be at a lower cost than what the retirement funds are making net of taxes.
Over the years I have had clients who thought they had no other option but to cash in retirement accounts in order to survive a financial crisis only to discover with our help that other options they had not considered would be better.
This goes to the value of working with a Certified Financial Planning Professional™. Sometimes a person looking from the outside into your situation sees things that are not clear to you when you are in the stress of a financial crisis. Before ever cashing in retirement funds, I would urge you to go meet with a CFP® first and get that outside view of your situation.
Sometimes, a financial crisis doesn’t prompt a person to withdraw from their retirement accounts. There are unscrupulous financial advisers and institutions that will promote a product or service they claim will make more money than the current retirement accounts. Oftentimes they use fear of a potential stock market crash as a reason to withdraw from a retirement account and purchase their annuity product or fixed income product.
Don’t let someone scare you into making a drastic irreversible decision. Yes, the stock markets crash, but after every crash in the last 100-plus years the stock markets recover. Also, after every recovery the markets have gone on to set a new high. As you get close to retirement, you need not worry about a crash wiping out your retirement funds. Proper planning with your retirement account representatives can show you how to be protected for such a crash and give you time for your portfolio to recover.
Unfortunately, I have seen unscrupulous advisers fix on school teachers and government employees. Over the years I have reviewed many of these claims that people have brought to me for a second opinion and, as of this writing, I have not seen one offer that was better than the person’s retirement accounts. All the ones I have seen paid the adviser a very high commission and usually locked up the client’s money for a longer period than the current retirement plan. Government pensions such as the Teacher Retirement System are well managed and offer great benefits.
These financial advisers offering alternative investments to retirement accounts generally target people 59 ½ years of age or older because now they can withdraw without extra penalty taxes. So, as Gen X ages it might be beneficial to listen to some Baby Boomers who have already been down this trail.
The bottom line is do not make an irreversible decision like cashing in a retirement account on your own. Seek professional advice and talk with people you respect and trust. As always, I am biased toward my own profession and would encourage you to seek a CFP®.
Wes Shannon CFP® is a Certified Financial Planning Professional for Brazos Wealth Advisors in Fort Worth.