A recent Bank of Montreal survey found that the amount we’re withdrawing early from our RRSPs has increased to an average of $21,000, and 40% of us are taking money out of our RRSPs way before retirement.

Why? The top three reasons are to pay for living expenses (23%), for an emergency (21%), and to pay off debts (20%). It’s a horrible idea for all three of them.

The survey inconveniently leaves out the fact that this figure of $21,000 includes the people taking money out for first time home purchases, which inflates the average by quite a bit.

But for those of us taking out money for bills, emergencies, and debt – don’t do it. I know it’s hard to breathe and even harder to sleep and function when you’re in financial trouble. I’ve been there – and I’ve done it. But take a time-out and look at every alternative before you kill your retirement money, because there are alternatives.

First, you think you’re solving a problem today, but you are creating three much bigger ones: Next April you’ll have to pay tax on that RRSP withdrawal. Since you clearly aren’t flush with cash now, you won’t be next April, either. You’ll also have tax withheld off the amount you’re cashing out. So cashing out $10,000 from your RRSP really only gets you 80% of it, or $8,000.

And finally, that $10,000 isn’t growing and compounding inside your RRSP anymore. In 20 years from now, that’s cost you around $30,000 in lost income. Out $2,000 tax withholding – out more tax next April, and out $30,000 or so when you get close to retirement. It’s an entire chapter in the Money Tools book called “Today’s problems become tomorrow’s nightmare.” Go down to Mosaic and invest the $20 in the book that’ll save you $35,000 or more in this example alone!

The book will also give you a ton of ways to solve your cashflow problems without killing your RRSP. You need to decide if the problem today is so bad and urgent that you’re willing to trade some relief today for significantly increased financial problems by not having that money when you’re retired.

Is your emergency a real emergency or something you can save your way into over a couple of months? Do you understand the math of paying off a debt today and how little that saves you when compared to five to ten times the cost of cashing part of your retirement savings? Can you take a deep breath and finally do a 15-minute budget to see where your money is going? Will you acknowledge that your current financial plan sucks and this is going to be necessary again unless you’re prepared to change some things around? Can you get an overdraft, instead? Yes, it’s a horrible idea, but better than the alternative you’re considering? How about taking it out of a credit card? No, it’s not a good idea, but the lesser of two evils even at 20%. Yes, there are more alternatives. I hope you read the “tomorrow nightmares” section of the book BEFORE you make the call to get the money.

George Boelcke – Money Tools & Rules book – yourmoneybook.com