Notorious criminal Willie Sutton was once asked why he chose to rob banks. He replied, “Because that’s where the money is.”

Fortunately, the vast majority of people don’t pick up a gun to rob financial institutions. But it seems to be part of human nature that whenever there is a large source of money that we have the ability to tap, we will try to get access to it—even if it might not be in our best long-term interest to do so.

A common form of this is when people refinance their mortgage to buy things like expensive vacations, RVs, or other “toys.” With the interest-due compounding over time, that financed bass boat can end up costing multiples of its initial sticker price.

Another source of money people tap into when they shouldn’t is their retirement account. Until recently, doing this came with a substantial financial penalty. For example, in years past if you made an early withdrawal from your 401(k), you had to pay a 10% penalty.

That changed temporarily in 2020 with the passage of the CARES Act. Under the new law, those younger than 59.5 could access up to $100,000 from their 401(k) accounts without a penalty. This was intended to help those affected by COVID. This penalty-free access went away for everyone in December 2020. However, some people affected by federally declared disasters other than COVID are eligible for penalty-free withdrawals.

But even without the 10% fee, “borrowing” money from your retirement account before retirement age for anything other than an absolute financial emergency is a bad idea.

Olivia Mitchell, executive director of the Pension Research Council at the Wharton School of Business says that people don’t seem to understand the long-term financial ramifications of early withdrawals.

In The Wall Street Journal she gave the example of a 40-year-old woman who takes out $50,000 from her retirement account. Assuming a reasonable rate of return of 5.7%, she would give up more than $233,000 in retirement assets at age 67.

Mitchell says that if you convert this into annual benefits, the woman would lose out on $14,000 per year for the rest of her life.

Or think of it this way: her initial $50,000 “gain” is eclipsed by her $14,000 annual loss in just over 3.5 years. [3.5 x $14,000 = $49,000]

For this reason, Mitchell applauds the withdrawal penalty as something “needed to remind people that (their retirement account) is not a piggy bank.”

Before you decide to raid your retirement account, be sure to talk with your trusted advisor. We can help you sort through your needs and find a solution that won’t jeopardize your future. Withdrawing a little now can cost you a lot down the road.