My husband is 53-1/2 years old and recently put on permanent disability because of numerous complications from diabetes. He also will be receiving a small pension from his former employer.
We understand that he will not be penalized (10%) for touching his 401K since he is disabled, but will be taxed on whatever he draws. He has an option to withdraw, rollover into another IRA or just leave money until needed. I am his wife and I am 49 years old. I am working and feel my job is stable, but you never know in this economy.
I currently put away 401K at a rate of 18% of my pay of $73,000/year. My employer contributes towards my 401K too. Since my husband is not able to go back to work, we no longer have the two full incomes. We have a large mortgage of $675,000, substantial credit debt of $45,000, a home equity loan of $50,000. We were doing okay while we were both employed, but since the credit card companies have substantially raised interest rates and minimum payments, we are finding it more difficult to stay afloat and save anything.
Some of the credit cards have raised their monthly minimums from $200/month to $500+/month. Because of the increase in interest/minimum payments, we feel that we are going through our small savings quickly and can’t replenish it. All our dollars are spent for mortgage, bills, etc.
My husband is thinking to draw some money to pay off the higher interest/minimum payment cards OR all the credit card debt entirely. Do you recommend this? He feels that we won’t be able to stay afloat at this rate. We have good credit and would like it to stay that way. If we can get rid of the credit cards and put them away, we feel we will be in good shape.
Thank you for your question. Your situation is one of change. If all things had stayed the same then the life you had created would not be impacted. But one of the critical cogs changed and now it is an entirely different situation.
As you said, “We were doing okay while we were both employed…” and now you are not. And there is the problem.
You are both relatively still young in todays life expectancy. Your husband could easily be around another 25 years, and years with no income coming in. You’ll have to be able to get by on the money you have saved, the retirement funds, the small pension and some social security. Trust me, it is never enough.
In my opinion I think it is a colossal mistake to tap the retirement funds to service or pay any amount of the credit card debt. Here is why.
Since your husband is no longer earning money, anything he has saved in his retirement funds will have to carry him through the rest of his life. As long as those funds remain in his retirement fund they are protected from the creditors. If he gives up those funds to pay debt the debt may be paid off but he will be significantly poorer and less able to care for himself for the next couple of decades, or more.
You’ve already noticed symptoms of this problem when you say “… we feel that we are going through our small savings quickly and can’t replenish it.” That’s right, because you can’t. Your retirement funds are more precious than water to someone who needs to cross a long hot desert. These are dollars that can’t be replaced but will be needed to prevent you from falling into a less than optimal situation.
So, now for the tough part. This is the fact that you have not wanted to face, but we have to. Your situation has changed. The equation has changed. And no matter how much we want everything to remain as it was, it can’t.
The loss of the income from your husband has changed what you can afford. You now need to adjust your life to be based on your income and the money he receives. That change is going to alter what you can afford to pay and potentially where you live. I don’t know if you can continue to afford it. Everything must be on the table for consideration here.
As part of that change and the changes you MUST make to get your life back in alignment with your current financial state. So what are the options then? Everything. In a perfect world change would not be necessary. But then again, in a perfect world he would not have become disabled and lost his income that was helping to keep your boat afloat.
Unfortunately you have uncovered the prime problem with debt agreements, they are absolute, but life isn’t. When you sign for credit you make a promise to repay, every month, a minimum amount of money in accordance with the terms the creditor stipulated and you agreed to. But life gives us no promises through the term of the loan that it will guarantee us a minimum amount of health, happiness, or anything. And therein lies the problem.
I do have some questions that I’d like for you to answer so I can guide you further. Just post your answers here in the comments section of your question.
- Is this credit card debt in both of your names?
- I assume the home equity loan is in both of your names. Is that correct?
- You owe $725,000 against your house. What is it actually worth? How much equity do you have?
- Would you rather make life adjustments or lose retirement funds and remain where you are?
- How much does he have in retirement funds that he can touch?
- How much money do you have left in savings or an emergency fund?