Jay
“Dear Steve,
I’ve read every argument against cashing out a 401k/IRA and current savings money to pay off debt, but I think each situation has its own merits. Here is mine:
70k in CC debt
95K in IRA/401k/Investments
We have changed our spending habits and have aggressively been paying down the CC debt, but at the rate we are going, nothing extra gets attention. Im 40, I also have a military retirement worth about $3200 a month, the wife works two jobs. After paying bills we have about $800 left. We have changed our lifestyle and spending habits, although our debt came from going down to 1 income for about 3 years so she could raise kids.
If I get rid of the CC Debt, I’ll have about 3800 coming in that we’ll be able to start saving again, paying our saving back so to speak. At the rate we are going it just seems we’re treading water and seeing very little headway into paying the debt down.
Most of the arguments I see against paying the debt off with retirement money doesn’t take into account a montly pension that is gauranteed? I understand the penalties, lost opportunity cost, taxes and all. But it just seems like we can be done with this debt and start new. Any help or advice is greatly appreciated.
Jay”
The Answer:
Dear Jay,
You sound like a smart guy that has done a lot of research on this issue. I salute you for that.
I think this is one of those decisions that is most often made with emotion, rather than logic or just on the numbers.
The most important question we need to ask is what is your primary goal, to protect your retirement or dump it to meet the bills.
There are alternative solutions that will let you repay what you can afford based on your income and let you be totally out of debt in 3 to 5 years without tossing away your retirement.
Putting all the emotional mind freak stuff aside about the stigma of bankruptcy, there is no dispute that bankruptcy would allow you to protect your 401(k) investments, enter into a debt repayment plan that is based on your income and would give you an end date when the mission would be achieved.
A typical argument I hear against bankruptcy is “But Steve I need to honor my promise to repay.” I get that, I really do. And if you go bankrupt there is nothing that would prevent you from latter repaying your creditors the balance of what you owe them if that is what you want to do.
In your current situation you are paying the bills but just of the edge of a potential disaster. $800 is not a lot of money left to pay for normal living expenses, food, or to put into savings. If you are going to dig your way out of this battle with debt I think you seriously need to consider the MOAB debt option and go talk to a local bankruptcy attorney. Call and ask for a free bankruptcy consultation and go in and get all your questions answered. Then go home and let what you learned percolate for a couple of days before you decide to go bankrupt, or not.
If you don’t want to launch an offensive against the enemy in your situation, your creditors, then just let them have free reign to the ammo and fuel dump, your retirement funds. But if you do this, don’t bitch about being broke and poor when you get old.
Please update me on your progress by posting updates here in the comments section of your question. I’m very interested in how this works out for you.
P.S. Be sure to read ‘The Secret of Surviving Through Difficult Economic Times. What I Learned On My Journey‘.