Ask The Get Out of Debt Experts Housing Retirement Related

Facing Unemployment and Wanting to Cash Out Retirement. – Susan

“Dear Steve,

My husband and I are in our early 40s. I am a stay at home mom, we have three kids, ages 1, 2 and 3. We have $190,000 in retirement funds (IRAs and Roth IRAs). We have $160,000 in mortgage debt (3.75% 15 yr term). We have no emergency savings account, no other debt. My husband’s job is in the homebuilding industry, while we are concerned of a layoff in the next 12 months, we are concerned about the longer term employment prospects given the current economy.

Should we liquidate enough of our retirement funds to pay off our mortgage? It is tempting because if my husband loses his job, we’d have to withdraw our retirement funds to cover expenses. If he did lose his job, it would most likely be as a result of the economy tanking and in all likelihood our retirement accounts would be down as well. We would be forced to withdraw AFTER the market has crashed. I am very concerned the market is going to drop and we won’t be able to leave the funds in to wait for a recovery. We’re tempted to cash out now and at least have our home paid for.


Dear Susan,

Here is the problem with that strategy. Let’s say you do that and things don’t turn around. You find yourselves running up debt because you have no savings to cover you in case of an emergency.

Without replacement income it is possible that a bankruptcy might be in your future. In that case the house would be sold, creditors repaid and any balance given back to you. That balance would be much less than what you had after paying taxes and penalties from withdrawing the money.

As long as those funds remain in the retirement accounts they would be protected from your creditors even if you found yourself facing bankruptcy.

READ  We Are Flat Broke And Need to Drain Our 401(k). - Susan

Besides, cashing out the accounts would cost you a ton of money in income taxes and penalties. By my calculation you’d only be left with about $130,000 or so after all that.

If you think cashing out the retirement funds is still the way you want to go, meet with a local tax professional to fully understand what your liabilities would be, first.

A better option facing this situation might be to fire sale the house, protect the retirement accounts by leaving them alone, and downsize your living arrangements, even consider renting.

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.


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About the author

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.


  • Hi Susan,

    I completely agree with Steve, leave the money in retirement. If your husband finds himself laid off, then you may need to borrow from that to stay afloat for a bit. He won’t be out of work forever, things will turn around eventually in home building, or he could reinvent himself and find work in a completely different field if it got to that.

    There may be a way to keep your home and still survive a period of unemployment should that arise. You mentioned that you had no other debts and a 15 year mortgage. You may want to look into the possibility of refinancing into a 20 or 30 year loan. You have a great 3.75% interest rate now and stretching it out would surely raise the interest rate, but it could result in a savings on your monthly mortgage payments to help get you through the slim times.

    If you stayed on the 30 year loan for the full term it would end up costing you a lot more in interest than staying in the current loan you have now. When your husband got back to work and the income returned to normal, you would want to start exploring ways to get back into a more aggressive loan to save on interest, if you could afford to.

    Should you start looking into refinance options, you may want to begin with the lender you currently have. They may be able to help. You will also want to begin this process while your husband is still employed, you will probably hit roadblocks if you wait until he is laid off to look into options.

    If you find yourself unable to refinance and unable to make the mortgage payments, Steve is right, look to sell the home and downsize. Your retirement funds are in the right place and they should remain there to be used for exactly that, retirement!

    You’re doing the right thing by preparing ahead of time, should something happen with your husband’s job, preparation could save you many sleepless nights. It also wouldn’t hurt to start cutting back on unnecessary expenses now and building up that savings account as much as you can afford to. The extra cash will certainly help and so will some experience with a tighter budget, should a lay off happen.

    I wish all the best and good luck.

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