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Spokane, Washington  Est. May 19, 1883

Motley Fool: Don’t make these risky retirement moves

Come retirement, most of us will need a sizable nest egg.  (Getty Images)

It’s tempting: You suddenly need a bunch of money for something – maybe a new transmission, maybe a kitchen remodel. And you have a bunch of money sitting in a retirement account, such as an IRA or 401(k). Why not withdraw – or maybe just borrow – some?

There are multiple reasons not to. For starters, come retirement, most of us will need a sizable nest egg. Relatively few people have pension income to look forward to, and the average monthly Social Security retirement benefit was only $1,841 as of September – that’s only about $22,000 for the year. So any money withdrawn means a smaller nest egg, less able to support you in the future.

Money withdrawn means you’ll be missing out on its growth, too. Imagine, for example, withdrawing $25,000 from an account when you’re still 20 years from retirement. If those dollars stayed in the account and grew at an annual average rate of, say, 8%, they’d become more than $116,000. (Money simply borrowed will also miss out on years of growth – and many borrowed dollars are never repaid, either.)

Meanwhile, if you withdraw money from a 401(k) or a traditional IRA before age 59 ½, you’ll likely face a 10% early withdrawal penalty. Ouch. And there are taxes, too. Your withdrawal is likely to count as taxable income for federal taxation – and possibly for state and local taxation, as well. (The rules are more lenient for Roth IRAs.)

With our $25,000 example, you might be hit with a $2,500 penalty and owe $5,500 in federal taxes on it, totaling $8,000 – and leaving you with just $17,000 (before state or local taxes).

Many people simply cash out 401(k) accounts when they move from job to job, often figuring that the sums involved are not that significant. But small sums can become very large when left to grow for a long time.

It can be hard to avoid the temptation of tapping your retirement accounts, but it’s much better to leave your money where it is.

Ask the Fool

Q. What’s the average price of homes sold in the United States? I know home values have been rising, but I’m not sure by how much. – R.Y., Hackensack, New Jersey

A. You’re certainly right about home prices rising! According to data from the St. Louis Federal Reserve Bank, the average sale price of a home sold in the U.S. was $513,400 as of the third quarter of 2023.

That’s actually down a bit from a year earlier, 2022, when the average was a whopping $547,800. But overall, home prices have indeed been rising quickly. In the third quarter of 2021, the average was $473,000, and in 2020, $397,800. A decade ago, in the third quarter of 2013, the average was $324,400.

Remember, though, that averages can be skewed by ultrahigh or ultralow figures, so it’s often best to look at median numbers. The median sale price of houses sold in the U.S. (also according to the St. Louis Fed) is $431,000 for the third quarter of 2023. That means that if you lined up all the sold homes in order of value, the middle one would have sold for $431,000. A decade earlier, the median was much lower, at $264,800.

Q. I bought some stock, but my brokerage didn’t send me paper stock certificates. Is that normal? – B.K., Eden Prairie, Minnesota

A. It’s very normal – and a good thing, too. Brokerages these days will routinely register shares that investors buy in “street name” – that is, the name of the brokerage. But they keep track of the shares and know they’re yours. This makes it easy for you to sell whenever you want, without having to find and deliver paper certificates you’ve kept in a safe place.

My Dumbest Investment

My most regrettable investment move was holding onto shares of Nvidia for too long. I thought it would reverse a downward trend and go up again. Instead, I let $13,000 in profits slip through my hands. – C.T., online

The Fool responds: We hope you haven’t unloaded those shares, because you sent in this story in December 2022, and shares of the semiconductor specialist have risen over 200% since then!

Your experience illustrates how powerful it can be to stick with companies whose futures you believe in – for many years. Just about every stock – whether it’s tied to a shaky or solid company – will go up and down from day to day and even month to month. Long-term investors need to accept such volatility and focus on, well, the long term. Several years from now, do you believe that a given company will be bigger and stronger? If so, consider hanging on.

Still, there are times when it might be wise to sell. For example, many market darling stocks will sometimes soar far beyond a reasonable valuation. If you’re holding such a stock and think it has a decent chance of retreating toward a more reasonable valuation, you might sell some or all of your shares. But if you plan to hold for five, 10 or more years, it can be fine to just hang on.