Key Takeaways
- Cut discretionary spending first
- Don't make permanent decisions for temporary problems
- Your 401(k) should be last resort, not first
Extending Your Runway
"Should I stop my 401(k) contributions?" — Let's talk about what to cut and what to protect.
Smart Cuts (Do These)
Immediate, easy reductions:
| Cut | Monthly Savings |
|---|---|
| Streaming services | $50-100 |
| Gym membership (or pause) | $50-100 |
| Subscription boxes | $30-100 |
| Dining out | $200-500 |
| Impulse shopping | $100-300 |
| Premium services (downgrade) | $50-200 |
Negotiable expenses:
| Action | How to Ask |
|---|---|
| Call credit card companies | Request lower interest rate |
| Contact landlord | Ask for temporary reduction |
| Review insurance | Increase deductibles for lower premiums |
| Student loans | Request income-based repayment or deferment |
| Car payment | Ask about payment deferral programs |
Dangerous Moves (Avoid These)
| Temptation | Why It's Dangerous |
|---|---|
| Cashing out 401(k) | 10% penalty + 22-37% taxes = lose 30-50% |
| Panic-selling investments | Locking in losses; market timing fails |
| Major relocation | High moving costs, disrupts job search network |
| Taking on new debt | Compounds problems; interest adds up |
| Stopping all retirement contributions | You're employed spouse might still have match |
| Buying something to "feel better" | Emotional spending you'll regret |
The 401(k) Question
Should you stop 401(k) contributions? Consider:
| Situation | Recommendation |
|---|---|
| Still receiving employer match | Keep contributing to get match |
| No match, tight budget | Okay to pause temporarily |
| Spouse still employed with match | Keep spouse's contributions |
| Considering withdrawal | STOP—this is almost never the right move |
Never Cash Out Your 401(k)
| If You Withdraw $50,000 | |
|---|---|
| Federal taxes (24% bracket) | -$12,000 |
| Early withdrawal penalty | -$5,000 |
| State taxes (6%) | -$3,000 |
| You Actually Get | $30,000 |
You'd lose 40% immediately. And you lose decades of compound growth.
Only consider 401(k) withdrawal if:
- You're about to lose your housing
- You've exhausted ALL other options
- Even then, take only what you absolutely need
The 401(k) Temptation
Single parent wanting to cash out retirement
Setup
A single parent client wants to cash out their 401(k) "to have a cushion" during their job search. They have $80,000 in their 401(k) and think having cash will make them feel safer.
Client says:
“I've been thinking about cashing out my 401(k). I know there are penalties, but I'd rather have that money accessible than locked up in retirement. I have about $80,000 in there, and it would really help me feel secure knowing I have that cushion. I'm 42, so I have plenty of time to rebuild it once I'm working again. What do you think?”
Practice Objectives
- 1Calculate the actual amount they would receive after penalties and taxes
- 2Show the long-term cost in lost retirement savings
- 3Explore alternative ways to build their "security cushion"
- 4Acknowledge their fear while redirecting to better solutions
If someone under 59½ cashes out a $50,000 401(k) in the 24% federal tax bracket with 6% state tax, approximately how much will they actually receive?