Dear Retirement Adviser,
We’re getting ready for retirement, and I’m wondering if it is worth taking a portion of our 401(k) to pay off high-interest credit cards. We’re looking at $14,000 to pay them off, leaving $100,000 still in the fund with my spouse still working. My husband is 62 years old. Social Security will not be as high each month. We’re trying to figure if it would be smart to make about $600 a month in credit card payments at just the minimum due.
— Carla Creditors
I often have misgivings when seniors ask about raiding their retirement accounts. You’ve spent your working career building this nest egg, and it’s there to meet your income needs in retirement. How does using the money to pay for your spending in the past help meet your future income needs?
In your case, it eliminates interest expense on your credit card debt. In your letter, you say that your credit cards carry a high interest rate and that you’re looking at making minimum payments. Both are a recipe for disaster for seniors living on fixed incomes. While you can find lower rates for credit cards, some charge 20 percent or more. If you only pay the minimum, it could take over a decade to get out from under the debt. Bankrate’s “True Cost Of Paying The Minimum” calculator can give you more information.
Unless you’re raiding a Roth account, you’ll owe income taxes on the distributions out of a tax-deferred retirement account. You need to consider the taxes due, so you might have to tap the account to pay that as well. Taxes aren’t due at the time of the distribution, although you could have to pay a quarterly estimated tax payment. If you’re in the 15 percent marginal federal income tax bracket, for example, it takes a $16,471 distribution to clear $14,000 after taxes.
If you decide to tap the retirement account to pay your credit card balances, I’d like you to promise to do two things. One would be to start living within your means. The other would be to work toward rebuilding your savings. That’s even if it has to be outside of a tax-advantaged retirement account.
I’ll also suggest that you work to maximize your Social Security benefits in retirement. Some professional advice involving your retirement income needs can be money well spent.
Ask the adviser