When and How to Take Out Retirement Funds

Those nearing retirement age may be thinking about when to start tapping into retirement savings. Making this decision can be difficult, and there are several rules around when and how you can access these funds. To further complicate things, some may need to access retirement funds early, which can come with a heavy penalty. The guide below will walk you through when, how, and why you should start taking out retirement funds. 

If you’re thinking about making scheduled retirement savings withdrawals, it might also be time to take a closer look at your physical health. Whether you’re still out and about or living a less active life, a medical alert system can provide the emergency communication you need to feel safe. When talking to a financial advisor or spouse about retirement funds, use the occasion to begin discussing overall health and wellbeing. A medical alert system may be part of that equation.

The IRS provides guidance for those who want to start using retirement funds. In most cases, the agency allows people to withdraw from these accounts without penalty after they reach 59.5 years of age. The agency also requires withdrawals after a person reaches the age of 72. There are some exceptions to these rules for 401(k)s, but if you plan to withdraw early, know that you will owe federal income tax on the funds. Additionally, you will likely pay a 10 percent penalty on the amount withdrawn. 

If you have hit the minimum age requirement and are still working, you might want to wait on beginning to withdraw. The longer you wait, the more savings you can accumulate. Living on a fixed-income budget can be difficult for elderly folks, even those with robust savings accounts, so those with current employment should weigh the benefits and disadvantages of tapping these funds. 

In fact, you might not even be able to begin withdrawals while employed. There are certain rules around accessing funds from a 401(k) plan sponsored by your current employer. You will need to check with your plan administrator to see if you have the option for an “in-service withdrawal.” Some plans will allow for this, but other’s will not. 

If you have hit the minimum age requirement and choose to begin withdrawing funds, you’ll need to figure out how much to withdraw. We recommend deciding on a rate of withdrawal over time to ensure you won’t outlive your savings. Importantly, you’ll also want to withdraw enough to live comfortably. Many financial advisers recommend taking out 4 percent of your retirement savings the first year, then adjusting as necessary later. 

Remember that withdrawing from a retirement account before reaching the minimum required age means dealing with hefty fees. When people withdraw from retirement funds early, they typically do so in large amounts, often to cover a large bill or to invest in a large purchase, such as a deposit on a senior living facility. As a result, the imposed penalties – income tax and a 10 percent fee – will add up. If you want to withdraw retirement funds early, think through the decision with other stakeholders, such as a spouse or children. There are also several resources available to help you understand whether you should make an early withdrawal. 

As we’ve previously covered, living on a fixed-income budget can be hard. Understanding recurring costs can help you better plan for when to tap retirement savings. For some, this could mean anything from anticipating the need for a medical alert system to a dog walker. Think through the ways in which your life could change, then develop a budget based on these costs. For those thinking about choosing medical alert systems from Alert1, know that our costs are well below Life Alert costs, which means you should see a little extra room in your budget.