Vice presidential candidate and Minnesota governor Tim Walz dipped into his retirement account early to help drum up $135,000 for his daughter’s education. That move grabbed headlines because many people can’t imagine using their retirement accounts for something like that. Did Walz make a bad financial move, or was there hidden genius behind it?
Walz’s Finances
The Governor of Minnesota doesn’t make his finances publicly available, but we can make educated guesses. He’s worked as a teacher, as a member of the Army National Guard, and, obviously, as a politician. This has earned him some significant pensions, which represent considerable retirement income.
Further Estimates
Some journalists have estimated that Walz and his wife Gwen have something close to $1 million in retirement accounts. This would mean the $135,000 they dug out for their daughter is only a small portion of their retirement savings, but that’s not the whole picture.
Why You Should Never Touch Retirement Savings
Retirement savings are taxed differently than other savings accounts. Money you contribute to something like a 401(k) gets taxed at a much lower rate if you only cash out of it when you retire. If you touch the money before then, it’s taxed at a much higher rate. Moreover, if you pull money out of your retirement account earlier, you’re not accruing the full interest it could be worth.
Compounding Interest
The most straightforward benefit of a retirement account is that it offers great interest rates on the money you contribute to them. And, what’s better, the money your account earns by accruing interest helps you earn even more money by accruing interest itself later. It’s a snowball effect that works in your favor! When you take money out of such an account earlier, you’re actually losing a lot more than just the initial value.
Leave Your Retirement Alone
Seriously, before you think you should follow Walz’s lead and dip into your retirement account early, reconsider. You likely don’t have the same pensions he does. He’s also a nationally-recognized politician who could probably ink lucrative book deals or speaking arrangements. Without that kind of celebrity, it’s not advisable to ever break into your retirement savings.
Consider Other Options
There are many better options than dipping into your retirement savings when a financial need arises. The most obvious answer would be to simply save up your normal income to help create an emergency fund you could use in case of immediate need. However, that doesn’t help if you’re staring down a problem now and you didn’t make an emergency fund beforehand.
Traditional Loans
One option is to just get a standard loan. Sure, you’ll owe interest back on the amount you borrow, but that’s likely to be less of a drain on your finances than taking money away from your retirement account would be, given what you stand to lose in compounding interest.
Credit Cards
Similarly, you could try to cover a sudden need with credit cards. This is a move you should only consider if you think you can pay the amount back quickly, though, as credit cards often have somewhat steep interest rates. This can make them expensive forms of borrowing money if you’re not careful.
Read More: 20 Tips for Early Retirement
When it Would Make Sense
The only scenario in which it would make sense to tap into your retirement account is if you think the current emergency you’re facing will cost you more than you stand to lose by pulling your money away from compounding interest. These scenarios are rare. While you should never say “never,” it’s something you should strongly consider against doing until you’ve exhausted every alternative.
Read More: 20 Tips for a Happy Retirement
Why did Walz Do It?
Don’t get too hung up on Tim Walz pulling money from his retirement account. Just because a governor does something, that doesn’t mean it’s a great financial move for you! He’s got a very unusual financial situation that most people simply don’t have, and he made a calculation based on his private finances. He’s not your financial advisor, he’s just a politician!
Read More: How to Start a Retirement Fund in Your 40s
