Retiree Fears Larger 401(k) Draws Amid Mortgage and Rising Costs

Sarah Jenkins, a 62-year-old from suburban Chicago, still carries a mortgage into what should be her golden years. She worries that money pulled from her 401(k) and IRA will need to top her old take-home pay to make ends meet. This fear comes as inflation lingers and new rules for retirement accounts take effect in 2026.

Background

Jenkins worked for 35 years in marketing, building nest eggs in a 401(k) through her employer and a separate IRA. Like many in her position, she planned to retire at 65 with payments covered. But home values rose, and she refinanced during low rates a decade ago, stretching the loan to age 75. Now, with fixed payments eating 30% of expected income, she second-guesses her math.

Across the U.S., millions carry debt into retirement. Data shows about 40% of those over 60 have mortgages, up from past decades. Living costs, from groceries to property taxes, have climbed steadily. Jenkins says her monthly bills now outpace what she saved for. She looked at selling the house but values location near family and dislikes the idea of downsizing.

Retirement planning shifted in recent years. Laws like SECURE 2.0 brought changes to how people save and spend from accounts. For 2026, the government raised limits on what workers can put into these plans. This aims to help those still employed pad their savings. But for Jenkins, already retired, the focus turns to withdrawals and how long the money lasts.

Key Details

Jenkins ran numbers with a financial planner. Her 401(k) balance sits at $850,000, IRA at $320,000. At a safe 4% withdrawal rate, that yields about $47,000 a year before taxes. Her old take-home pay averaged $55,000 after deductions. The gap widens with mortgage at $1,800 monthly, plus utilities, food, and health care pushing totals near $5,000 monthly.

'I still have a mortgage,' Jenkins said.

"I no longer feel confident that my costs will actually fall in retirement. I think my withdrawals from my 401(k) and IRA may need to be larger than my current take-home pay."

New 2026 rules offer some tools. The 401(k) contribution cap rises to $24,500 from $23,500 last year. Those 50 and older get catch-up amounts, though high earners face Roth-only limits. IRA limits go to $7,500, with $1,000 catch-up for over 50.

Withdrawal Options and Penalties

Early pulls from retirement accounts carry a 10% penalty if under 59.5, plus taxes. Jenkins passed that age, so she faces only income tax on traditional account draws. Roth portions come out tax-free after five years. She holds both types.

Starting 2026, plans allow penalty-free distributions up to 10% of vested benefits or $2,500 for long-term care premiums. Emergency withdrawals up to $1,000, started in 2024, give three years to repay without penalty. Roth conversions from 529 plans cap at $35,000 lifetime for beneficiaries.

Income rules tightened too. Traditional IRA deductions phase out for singles earning $81,000 to $91,000 if covered by work plans. Married joint filers see $129,000 to $149,000. Roth IRA phase-outs hit singles at $153,000 to $168,000, couples $242,000 to $252,000.

SIMPLE plans rise to $17,000 contributions. Required minimum distributions carry penalties if missed, now at 25% down from 50%.

Jenkins weighs part-time work. At her age, options include consulting, but health limits hours. She considers delaying Social Security to 70 for higher checks, now averaging $1,900 monthly if claimed soon.

What This Means

Jenkins' story reflects a wider shift. More Americans work past 65, with 20% of those 65-74 employed. Savings rates hover below targets; half have under $100,000 saved. Higher 2026 limits help younger workers, but retirees like her focus on spending down pots wisely.

Planners advise the 4% rule, adjusted for life expectancy now pushing past 80. Inflation erodes purchasing power; a dollar today buys less in 10 years. Health costs average $315,000 for a couple post-65.

Options include refinancing mortgages at current rates, around 6.5%, versus her 3.5%. But payments rise. Reverse mortgages let seniors tap home equity without monthly dues, repaid at sale. Debt payoff via lump-sum 401(k) draw risks depleting savings.

Financial experts push diversified income: annuities for steady pay, dividend stocks, or rental properties. Jenkins eyes a part-equity line of credit as backup. Community programs aid with energy bills or food.

For those planning ahead, maxing 2026 contributions cuts taxes now. Roth shifts build tax-free growth. Regular check-ins with advisors spot gaps early. Jenkins attends free seminars at her library, learning peers face same binds.

Her next steps: model scenarios with software showing 90% success odds at 3.5% withdrawal. She trims subscriptions, gardens for food, and drives less. Family helps with chores. Still, uncertainty lingers as markets fluctuate and costs evolve.

Broader economy plays in. Interest rates may fall, easing debt. But recessions hit portfolios. Government benefits face review; Social Security solvency eyed for 2035. States vary in property tax relief for seniors.

Jenkins holds hope. 'Adjustments keep me afloat,' she notes. Many follow suit, blending savings, work, and aid to bridge to stability.