I Cashed Out My 401(k) at 35 to Start a Business. Now What?

Dear Maxine,

I'm 35 and I did something stupid. I had about $87,000 in my 401(k) from jobs over the years. Two years ago, I quit and cashed it out to start a consulting business. I thought I'd be making six figures by now. I'm making decent money (around $95K annually), but I'm not rolling in it, and I keep thinking about that $87,000 like a ghost haunting me. The taxes and penalties already happened—I took home maybe $58,000 after everything. My business is stable but not exploding. I feel like I sabotaged my future for nothing. Should I be panicking?

—Marcus, Wisconsin

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Marcus, let's get this out of the way: yeah, that was rough. Cashing out a 401(k) before 59½ costs you the full tax hit plus a 10% early withdrawal penalty. You already know this. You lived it. So I'm not here to make you feel worse—you're already doing that job.

Here's what matters now: the $87,000 is gone, and spending mental energy grieving it won't bring it back. What matters is what you do for the next 30 years.

Let's talk about the actual math, because it's not as apocalyptic as it feels. If that $87,000 had stayed invested in a basic S&P 500 index fund for two years, it probably would've grown to around $115,000 (rough estimate based on recent returns). So you're missing out on maybe $27,000 in growth—terrible? Yes. Life-ending? No.

But here's the thing: you got $58,000 in actual cash to build a business that now generates $95K annually. That business is an asset. An asset that produces income. That's not nothing. Some people never build anything that generates their own revenue. You did.

The real question isn't whether you made a mistake two years ago (you did). The real question is: what are you doing with that $95K income now?

If you're not aggressively rebuilding retirement savings, that's where you should panic. You have 30 years until 65. If you max out a SEP-IRA ($69,000 for self-employed people in 2024) or a solo 401(k) and invest it conservatively, you could have over $3 million by retirement. Maybe more if your business keeps growing.

You won't rebuild that exact $87,000 timeline, but you can build something better—because this time you're doing it with income that's yours, not money you're borrowing from future-you.

One actionable step: This week, open a SEP-IRA or solo 401(k) if you haven't already, and set up an automatic monthly contribution of at least $2,000. That's $24,000 per year. It's aggressive, but you can afford it on $95K income if you're disciplined. Do that for five years, and you'll have rebuilt most of what you lost—plus kept your business alive.

The ghost only wins if you let it.