I cheated myself out of almost $100,000 by spending my retirement funds early, but that mistake taught me a lesson I live by

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  • I liquidated a retirement account I had in my 20s, confident I would replace the money - someday. That was an investment mistake.
  • If I had left that small, early investment alone, it would have grown by as much as 600% in the years since then. 
  • Now, my best strategy for growing my retirement savings is to simply leave it alone. 
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Saving for retirement is really pretty simple. A friend's immigrant grandmother had the right idea. She told my friend, "If you have a little, save a little; if you have a lot, save a lot." After saving, I add my personal cardinal rule about retirement accounts: Leave it alone. 

That isn't always easy. When you're broke, as many young people are, it's hard to imagine saving for something as distant as retirement. And, during downturns like the Great Recession, it's tempting to put all your money in CDs or tuck it under the mattress instead of contributing to a retirement savings account where the value of the investments is cratering.

I've done the wrong thing and the right thing with my retirement savings. Here's what I've learned along the way.

I cheated myself out of almost $100,000 by spending retirement funds early

In my 20s, in the early '90s, I worked for a very savvy lawyer. He put a lot of money into his retirement savings and later retired in his 40s. He contributed to a retirement account for me, too. 

That's how I ended up with $17,000 in a retirement savings account. It would never have happened through my own actions. Not only was I broke in my 20s, I also wasn't a saver. I had the Pollyanna-ish belief that I would have loads of money someday.

I applied the same "tomorrow will be brighter" philosophy to the money in my retirement account. Why save for retirement now when I would surely be fabulously wealthy by the time I retired? I believed I could make better use of the money in the present. 

When I cleared out that retirement account, I had to pay a 10% penalty - but I didn't mind. Because my boss had contributed that money on top of my salary, the retirement account felt like found money. I was happy to pay the 10% plus income taxes to get my hands on the rest of the cash.

It took me only a couple of years after leaving that job to completely drain the account. I always had a good excuse: the money would help me start a business, or move to a better apartment. The reality is that I could have found ways to accomplish everything I wanted to without that money. 

If I had left that $17,000 in retirement savings, I would be in a much better position in regards to retirement today, even if I never added more money to that account. 

The average rate of return on mutual funds for the past 15 years is 6%. Assuming that average was the same for the past 30 years, my $17,000 investment would have grown to $102,404. (Note: this calculation doesn't take mutual fund management fees into account. Fees can vary by fund and institution. When you subtract fees, the actual total would be less than $102,404.)

Of course, I never struck it rich. It took me another 15 years to start saving for retirement on my own, and the penalty for my poor savings habits early in life is steep: I'll probably work a few extra years before I retire, just to bridge that gap.

Even in a recession, I don't touch my retirement savings

Years later, towards the end of 2008 and in the early months of 2009, I was working at a different law firm and the Great Recession was bottoming out financial markets. My colleagues were anxious. 

In the lunchroom, my coworkers discussed what to do with their retirement accounts. I was a relatively new hire at that time, so my account was small. Some of them had worked at the firm for years, however, and had saved a lot. Even worse, some were nearing retirement. They had a lot to lose, and they had already lost a lot. Their faces grew ashen when they talked about the steep drop in their retirement accounts.

Even though I had little to lose, it was disconcerting to see the money I contributed to my 401(k) decrease each month. It felt like I was just throwing good money after bad. I considered stopping my monthly contributions or putting them toward a regular savings account. I wouldn't get much interest, but at least I wouldn't lose money. 

Fortunately, I had the sense to ask my financial planner for her advice about my retirement account. She told me not to touch what was already in the account and to keep making regular monthly contributions. 

Yes, the value of the mutual funds in my account was dipping. But every time I bought more of those same sinking funds, I got more shares for my money. Over time, the value of those shares would rise again and I'd be in a better position because I owned more shares.  

It was scary to follow this advice, but I did. I left my retirement investments alone and put more money away every pay cycle. As the economy climbed out of recession, those shares gained back their value and continued to grow. 

In 2013, I changed careers. This meant a period with low earnings. I wasn't able to contribute to my retirement savings for a few years, until my new career as a freelance writer took off. But I also didn't use any of my retirement money to finance this career change.

Just staying the course paid off. I'm able to put money towards my retirement again. Even without those contributions, though, my account would have grown. In the seven years since I left my old job, my retirement savings almost doubled in value.

It's impossible to know what twists and turns the economy will take between now and when I retire. Downturns are usually followed by upswings. Over time, the cycles even themselves out and the return on investment for shrewdly invested retirement accounts is steady. 

As I write this, the stock market has taken a nosedive because of coronavirus fears. Still, I stay calm and save on. This too shall pass and my retirement savings will bounce back.

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