When you hear someone dipped into their retirement savings early, it might set off alarm bells – and for good reason. Recently, Tim Walz, the governor of Minnesota and the Democratic Party's candidate for vice president, made headlines for doing just that. Walz made an early withdrawal of $135,000 from a 401(k)-type plan. While his campaign confirmed the move to the Wall Street Journal, they didn't provide much more detail on his finances.
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Walz isn't just anyone; he's accumulated pensions from a career as a teacher, a member of the Army National Guard, and an elected official. The average American cannot bank on this kind of retirement income. But like millions of other Americans, Walz does have access to retirement plans, which brings us to the crux of the issue.
The Wall Street Journal estimates that Walz and his wife, Gwen, likely have around $1 million in their 401(k) or equivalent retirement accounts – probably 403(b) plans since they were public school educators. So, that $135,000 withdrawal? It likely represented about 10% of their total retirement savings. And while that 10% was invested in their daughter's education, according to the campaign, that money will never get the chance to grow again.
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If you're considering making a similar move, you might want to think twice – no, actually, think three or four times. Financial experts, like Robert Seltzer from Seltzer Business Management in Los Angeles, would strongly advise against it. "You can't say never, but in general I think it is a very bad idea," Seltzer points out in a MarketWatch article. Dipping into your 401(k), 403(b), or IRA should generally be a last resort, reserved for true financial emergencies.
About half Americans have admitted to taking early withdrawals from their retirement plans, according to CNBC. That's a staggering number of people who are, essentially, borrowing from their future selves. And while investing in education feels like a noble cause – and it is – the harsh reality is that taking money out of your retirement savings now means missing out on the power of compounding interest.
In Walz's case, that $135,000, if left in his retirement account, could have grown substantially over the next decade. Thanks to the magic of compounding, it might have been worth far more by the time he'd have needed it in retirement. But with the early withdrawal, that opportunity is lost forever.
Now, there are of course exceptions to every rule, and so there are situations where an early withdrawal might make sense. For example, it might be justifiable if the investment is in something crucial like education, which could lead to better financial outcomes for your family in the long run. In Walz's case, given his multiple pensions and relatively secure retirement, the decision may not be as risky as it would be for someone without these safety nets. His stable pension income and other retirement benefits reduce his reliance on the 401(k) for future financial security, making this move less damaging than the average American's situation.
So, what's the take-away here? While it's tempting to see retirement savings as an emergency fund, the reality is that it's risky. Before you even consider making an early withdrawal, ensure you have a solid cushion in your retirement accounts to carry you through your golden years. Otherwise, you might be short on cash when you need it the most.
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