Should I pull money out of my 401k to pay off credit card debt?
We got this question on a financial advisor forum. Here is the fact pattern:
I am 65, planning to stay at current job for 5 more years. I have $300,000 in 401k and $60,000 in credit card debt. I am thinking of taking $50,000 to pay off most of debt and set aside $5000 in savings. I have no penalty to withdraw but will have taxes . Is this a good idea? My hope is that I would have money to pay cash and not charge up new debts.
And... here is my answer. Probably not the "soft and cuddly financial advisor" response the gentleman was looking for. But... retiring broke isn't "soft and cuddly" either. Frankly, retiring broke... sucks. We coddle ourselves financially in this society. People who are financially successful... DON'T.
My answer follows:
Honestly, I don't think that is a good idea. It may seem like a quick fix... but you know what they say about quick fixes! My first question that I would ask, if I were your advisor, is WHY do you have the $60,000 of credit card debt? That answer needs to be addressed honestly. If it was because of a one-time event (divorce, medical issues, helping a child with college, etc) then that is an entirely different animal than if your answer is... "I'm not really sure... but... lemme see..."
Based upon what you are saying in your question, I suspect the credit card balances have creeped up on you over time - this is usually a result of an incorrect, or a missing, BUDGET.
First and foremost, I would create a rock-solid budget. Don't fool yourself and don't let anything such as "monthly credit card bill" be on that budget. Get GRANULAR with that budget and make proactive decisions about what you WILL spend, and what you will NOT spend, in advance, and then stick to your decision. Analyze each expense for it's real value to your life, and decide if it can be lowered. For example - are you paying $150 a month for a cable bill? Would a basic package and Netflix be a better solution - and save $100 per month? How often to you go out for lunch? If it's more than once a week, then STOP that, and bring your lunch to work. Do you go to a coffee shop for morning coffee? Knock that off too, and brew up your favorite coffee at home and bring it in a Thermos. What is your grocery bill? How long would a 50lb bag of potatoes, a big bag of soup beans, and a dozen cans of green beans feed you? I'm serious - do what it takes, no excuses. Are you married? If so, is "spousal spending" the problem? Talk it out and get on the same page.
Get motivated, get focused, get MEAN with that budget. A no excuses, no surrender mentality with your finances is what this will take. Your parents who grew up in the great depression could probably live off half of what you spend... and give you change and the end of the week!
Once you have gone through this exercise, you will know the answer - are you living beyond your means - or perhaps your basic monthly expenses are just too much for what you are bringing in, and you need to see what other options exist (a move? Downsize? Even renting out a room?)
Now get creative, get focused, stay MEAN with that buget! After all, you only have one life to live (as far as we know) and one retirement.
At this point, you will have diagnosed the real problem - NOW you can come up with a workable strategy. I would initially say, do NOT withdraw from your 401k - but maybe you could scale back on 401k contributions going forward to free up the cash flow to pay off the credit card debt, as a last resort. If you need help or coaching, hire a fee-only financial advisor and tell them their job is to NAG and get MEAN! You CANNOT borrow money for retirement - no one will lend it to you!
Use a "debt payoff calculator" that you can find online, or make a spreadsheet detailing your payoff strategy. Tape it to your refrigerator and your bathroom mirror, and then stick to it; the only exception should be emergencies (real ones, not "I need a new TV" emergency). Think Rocky Balboa. This is no joke; being broke and running out of money in retirement is NOT a financial plan.
Good luck with this; it is difficult but you have 5 years to fix the problem. Do not discount the benefits of balance transfers to your lowest interest card, or negotiating with the credit card issuer, if that is an option.