I withdrew $75,000 from my 401(k) a couple of weeks ago because I was laid off. I’m 47 years old, made about $72,000/yr, and had $150,000 in my 401k. I’m married and have two teens. My wife worked part-time as a server at a high-end restaurant, but obviously that’s currently closed. We were already behind on some bills, and then our paychecks went away. I haven’t received unemployment yet, nor has my wife. We couldn’t wait any longer, so I took out the $75,000. It took my entire adult life to save that much, how in the world will I ever be able to retire? Did I just watch my financial life end?
Answer: I’m very sorry this is happening to you, Barry. You absolutely did not just watch your financial life end, but you’re not alone in feeling that way. Over the last several weeks, millions of Americans have had to do what they never thought they would have to do.
The next couple of years will certainly go differently than you assumed they would, but frankly, everyone is facing that same reality.
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There’s no doubt, unemployment benefits are taking longer to get in the hands of people than we all want. The shock of finding yourself with no income is traumatizing, and the longer it drags on, the more catastrophic it feels. The good news is, unemployment benefits are retroactive, which means you’ll receive benefits back-dated to the moment you filed. The maximum unemployment benefit in Texas is $521 per week and you will also receive the $600/week enhancement made possible through the CARES Act.
Your wife may be eligible for state unemployment, too, if she met the earnings threshold for the state of Texas. Either way, she should still be covered by the federal benefit of $600/week.
All this is to say, help is on the way. But obviously, it didn't come soon enough for some of the bill collectors figuratively beating down your door. That’s why you made the bold decision to withdraw $75,000 from your 401(k). Ideally, if you’re able to find work again in the next few weeks, you can put the remaining money back into an IRA to lessen your tax burden. While the CARES Act allows you to withdrawal up to $100,000 penalty free from your 401(k), you are still responsible for paying taxes on the money over the next three years.
The last thing you need is to get back on your feet, only to get knocked back down with a substantial tax bill in the coming years. Which is exactly what will happen if you’re not careful. That’s my biggest concern for you. Yes, going backward, $75,000 on your quest for retirement isn’t ideal, but coming up with $15,000 in tax money within the next three years is what will truly hurt.
If you started your career at around age 22, you’ve been in the workforce for roughly 25 years, and you’re likely to remain in the workforce for another 20-23 years. Not only must you deal with immediate challenges during this time, like the one you’re experiencing now, but you must also stay focused on three other vital factors: Long-term investing, cutting expenses and tax-planning.
These three factors are always important, but when emergencies happen, they instantly seem unimportant. Fortunately, all three of these factors are related to each other and are complementary to each other in the form of employer-sponsored retirement plans and/or IRAs. The keystone to the entire plan, whether you’re receiving unemployment benefits or you’re back working again, is to make sustainable spending cuts which can then be used to cut debt and more substantially fund your retirement plan.
Your financial life isn’t over, but the decisions you make in the next couple of years will certainly determine whether you have the sort of retirement you’ve always dreamed of. As hard as it is to do, you have to keep one eye on the distant future while still triaging the day-to-day financial challenges which pop-up along the way.
Once some of the shock and trauma of the moment wears off, I think you’ll see your financial life is not permanently ruined. It will just go differently than you thought it would. It’s up to you to make the proper decisions over the next 20 years to ensure long-term success.
Peter Dunn is an author, speaker and radio host. He has a free podcast: "Million Dollar Plan." Have a question for Pete the Planner? Email him at AskPete@petetheplanner.com. The views and opinions expressed in this column are the author’s and do not necessarily reflect those of USA TODAY.