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Should I Drain My 401K So I Can Pay Off Debt And Retire? – Cathy

“Dear Steve,

I am 65 yrs old, still working and my husband 71, retired.

Our income is $51k (me), and my husband’s SS benefit of $10k.

I used to have $250k Line of Credit/ c card debt. We’ve been diligently tried our best to pay and now the it’s down to $140k of Line Of Credit Debt on a home that worth only $120k (It used to worth $360k) and $15k credit card debt. Total of $155k debt. Luckily, my kids pay my car payment ($610) and I also receive about $1k from them every month.

I wanted to retire 3 years ago but my 401k has lost 40% of its value and for a decent medical insurance I am still working.

My 401k is about $80k and IRA ($100k) and my husband’s is only 90k (IRA).

My line of credit interest I paid in 2011 was $6850.

My Q: now that I’m close (or overdue) to retirement, would it be a good idea to use my 401k/ira to pay off my debt? I am fully aware that that will cause me lots of taxes.

Q2: Should I retire first and touch my 401k? or continue to work and use my 401k?. I don’t mind working for couple more years.

Any advice will be greatly appreciated. Thank you!

Cathy”

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The Answer

Dear Cathy,

Maybe you can help me work through the logic and we can find a way to get on the same page.

The situation as you described is that you are taking money to pay down your line of credit, instead of saving for retirement which is right around the corner. So your kids are having to help you out and give you $1,610 each month. You are 65 and only have jointly, $270,000 in retirement funds.

The way I see it is you have an underwater house you are paying down. You could have taken the $110,000 you paid down on the line of credit and saved that for retirement. That would protect you and take the burden off your kids.

Again, just from a logical point of view, are you not just simply paying twice as much for the house than it’s worth and facing retiring with a reduced income and not much in the way of savings?

If your kids want to help you, that’s on them, but by letting them do that you are taking money from them they could be saving for their retirement and their financial safety. That might feel good emotionally but does not seem to make logical sense either.

Let’s say you took a huge portion of your retirement money, which is protected from creditors, and then paid off your debt. Now you are left with a house that needs ongoing maintenance, taxes, and insurance and you can’t borrow against the home again or you will be right back in the same position. The only difference is you’ll now have half as much for retirement.

So just purely logically if you are underwater on your home, you should consider giving the home back to the bank, filing bankruptcy to discharge your debt and rent something you can actually afford on your future reduced income. Then take the next couple of years of work, live within your income, and save as much as you can for that day you actually do stop working. I always reserve the right to be wrong but that’s how I see it.

Please post your responses and follow-up messages to me on this in the comments section below.

Big Hug!

Should I Drain My 401K So I Can Pay Off Debt And Retire?   Cathy
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About Steve Rhode

Steve Rhode
Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.
  • dolliegirl

    It doesn’t seem right, but it looks like the only real option is to let the house go,and file bankruptcy. It is a shame our homes are worth less that we paid for them!

  • http://annuitystraighttalk.com/ christiehartshorn

    I agree if you are underwater on your home, you should consider giving the home back to the bank, filing bankruptcy to discharge your debt and rent something you can actually afford on your future reduced income.

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