Tapping into your retirement savings is just fine when it comes retirement time, but something you should avoid at all costs before you reach retirement time. The first reason is simply that it is very difficult to make that money up and put it back. The second is that there may be very stiff penalties to pay if you are borrowing the money from an IRA or 401(k) account.
When you are retired however, you will probably be in a lower tax bracket than you were during your working years. If you have money in a traditional IRA or a 401(k) only withdraw from it each month what you need because this money is tax deferred and you’ll have to pay taxes on it now. If you have $200,000 in a 401(k) account and pull it out all at once you’ll pay taxes on the whole amount, putting you in a very high tax bracket that year. But if you only need $20,000 of it a year, you’ll pay much lower tax percentages. Figure up your budget, including all sources of income you will have when retired and you’ll know how much you should take out of the 401(K) or the traditional IRA, SEP or similar tax deferred account.
This does not hold true for a Roth IRA. If you have $59,000 in a Roth IRA, remember that you never again pay taxes on that money or on the money that it earns for you. You’ve already paid taxes on the Roth once, before you invested the money. You will not be double taxed. Take out as much as you need, but no more because the Roth will continue to earn you more tax free money as long as it is invested.
Why would you be tapping into your retirement money anyway? Well the most obvious reason is to live. It takes money to exist. However, you should have your house paid for by the time you retire. With luck you’ve also got the cars paid off, as well as any other major expenses you’ve had. So, it should cost you a lot less to live now than it did when you were working and raising a family. Also you should have a social security check coming in that will contribute somewhat to the household income. If you’ve planned wisely you’ll be able to make the 401(k), the IRA and any other investments you have really pay off now. If you have any life insurance policies with cash value this could be the time to look at cashing them in as well.
Retirement should be the most enjoyable time of life. With the kids grown and no job to go to you and your spouse will be free to do the things you’ve always wanted to do. If you’ve planned your retirement well, then you’ll be able to do those things and then some. So don’t feel any guilt about tapping into the retirement savings, that’s what it is there for.