Why Starting 401(k) Withdrawals at Age 59 1/2 May Not Be Ideal

Rethinking 401(k) Withdrawals: Why Age 59 1/2 May Not Be the Best Time to Start

Raiding your retirement savings as soon as you're able to could lead to financial challenges. With increasing life expectancy, tapping into your 401(k) in your late 50s may risk running out of money. Waiting longer and working into your 60s could provide a more secure financial future. Learn why age 59 1/2 might not be the optimal time to start withdrawing from your 401(k).

When you put yourself at risk of running out of money

The fact that Americans are generally living longer these days is a good thing. But it does pose a financial challenge. Now, people who retire at an average age have to anticipate needing 30 years of income -- sometimes more. That's a challenging thing, as it can turn an otherwise large sum of money into a seemingly small one on an annual basis. Take a $1 million 401(k). That sure seems like a lot of money. But if you withdraw from a sum like that at a rate of 4% year, which is a withdrawal rate experts have long touted, you get just $40,000 of annual income. Now that may be enough to live a reasonably comfortable lifestyle, especially when combined with Social Security. But you're also not exactly living large on $40,000 a year. And that ties into my change of heart with regard to 401(k) withdrawals...

Plan to work longer -- and wait to start touching your savings

If your job is an utterly miserable one, then you may decide that it's worth tapping your retirement plan at age 59 1/2 to escape that awful situation. But if that's not the case, then it definitely pays to consider working well into your 60s and leaving your savings alone all the while. Of course, if you start taking 401(k) withdrawals at age 65 and use the 4% rule, you might still run into a financial issue if you happen to be someone who lives until 100. But for the most part, you're generally safer starting to tap your nest egg in your mid or late 60s than age 59 1/2. So even though you can access your money penalty-free at that age, that doesn't mean it's the right time to pounce...

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