The Cliff You Don’t Actually Care About

The Cliff You Don’t Actually Care About

August 23, 2022

When we need the answer to a question, the first stop today is the internet. We ask and our search engine of choice opens us to a world full of people ready to help. The problem: the help is contradictory. For example, a client asked this recently:

“Can I take money out of my 401(k) penalty-free?”

As a financial planner, it made me smile. I have seen dozens of answers to this question over the years. The answers could almost be organized from worst to best on a sliding scale. Here are a few of them:

Answers that are wrong: “You can take money out of your 401(k) at any age without penalty.”

Answers that are somewhat correct but misleading: “You can take money out of your 401(k) without penalty at age 63” (you can, but you can also take money earlier than that).

Answers you read in a generic article online that hedge to the point of becoming useless: “You might be able to take money out of your 401(k) without penalty at age 59.5 if you leave that employer. But to be sure, you should check with your financial planner, employer, attorney, tax advisor, banker, insurance agent, doctor, mother-in-law, and resident Hermione Granger”.

Answers you might occasionally see that are more correct but hard to find: “You can usually take money out of your 401(k) without penalty at age 59.5. You can also take distributions as early as age 55, provided you follow 72(t) distribution rules and take the exact amount each year.”

Then we start to cross over from information and into advice: not just what you can do, but what you SHOULD do.

You can readily find people who will give you the advice-version of any of the information you just read. The best advice, which is more difficult to find, comes from someone who is technically proficient and willing to give tailor-made advice merged with your particular situation.

For example: “You can take money out of your 401k penalty-free even though you are only 57, but I would not advise it. If you do, you will be limited to taking a very specific amount out of the account every year for either 5 years or until the year you reach age 59.5–whichever is more. This effectively locks you out of withdrawals above that amount until age 62. Knowing the big 30th anniversary trip you want to take in 3 years that will require extra money, you would have a tough time affording it because most of your money will be basically unavailable. Whereas if you take money from another account until you hit age 59.5, you maintain your flexibility.”

Another example: “You can take money out of your 401(k) penalty-free despite being only 55 because you are a firefighter (or disabled, or you handle nuclear waste, or you had a certain amount of qualified medical expenses, or any number of other exceptions), and it makes sense in your situation.”

Yet another example: “You could take money out of your 401(k) penalty-free at 55, but I would advise against it. Although doing so is your best option to access the income you need to fund your retirement, you will run out of money if you do it. Instead, you should find a new job that you actually enjoy at least until you turn 60. At that point, your portfolio could likely sustain you for the rest of your life, in combination with your pension”.

Great advice often does more than answer a question correctly. Sometimes it reframes the entire conversation. It might even render the original question obsolete. On a long hike, will it still matter if a mushroom you see is poisonous if your friend points out he has a sandwich for you to eat instead? You can always ask, but it may not be important to know the answer if you realize you don’t have to eat the mushroom.

It could also be compared to finding the best way to climb a cliff. You could find Youtube videos on how to better hang onto tiny ledges. You might even decide to take a class to learn from an advanced climber. They could teach you all kinds of tricks, map out the ideal route for you, and hold you accountable to practice.

But if you instead found a local guide and told him you were trying to scale the cliff because you wanted to see the little mountain town on the other side, the guide might instead point you to the trail off to the side that you can easily walk to the town. Better yet, he might ask if you want a ride in his car because he has a side gig as an Uber driver, and there’s a little road that takes you right there. As you lounge luxuriously in the back seat, you really no longer care how to scale the cliff.

Of course, if you love a challenge and climbing cliffs is fun to you, skip the car, ask questions about grip technique, and climb away. But if you don’t want to scale cliffs with your financial future, you may want to find that knowledgeable guide who is willing to hear you out.


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