Ask Bankrate: Questions about using retirement funds to pay off debt, refinancing while unemployed and more
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Ask Bankrate is a recurring feature where Bankrate’s experts answer your financial questions. Visit this page for more information on how to submit your question. Click on a question here to jump straight to it.
- Withdraw retirement funds to pay off credit card debt?
- I’m unemployed. Can I refinance?
- Should I turn 401(k) and 403(b) into Roth accounts?
- Retiring in 2021. How do we lock in our account balances?
- What’s the real deal with annuities?
Q1: Withdraw retirement funds to pay off credit card debt?
I’ve put extra money away and now have about $100K in there. I am 62 and have $8K in credit card debt. Should I withdraw from my 403(b) and get rid of that debt?
— Deb C.
Answered by James Royal, senior investing reporter: “Congratulations on having built a sizable nest egg – now focus on getting that money to grow by leaving it in there and letting it compound. Taking money from your retirement account is one of the biggest mistakes you can make. Clearly you have saving discipline, so now you can turn that discipline on to your debt and find some other way to pay off your credit card balance.”
Q2: I’m unemployed. Can I refinance?
I would like to refinance my mortgage to take advantage of low interest rates. Are there any banks, credit unions or other lenders who will refinance a mortgage when the homeowner is unemployed? I’m receiving unemployment insurance benefits that cover my living expenses, including mortgage payments.
I’m current on my mortgage payments and have an excellent FICO score (around 800). My current mortgage is a 30-year fixed at 3.625 percent with 23 years remaining, and the loan-to-value is less than 40 percent.
— Amy B.
Answered by Jeff Ostrowski, senior mortgage reporter: “Condolences on the job loss, and congratulations on your previous financial successes. To answer your question, it will be very difficult to refinance a loan while you’re unemployed. Lenders are looking hard at borrowers’ incomes, and a layoff or furlough essentially disqualifies you from being approved.
The bigger question, though, is why refinance? The average rate on a 30-year fixed-rate mortgage for the week of May 14-20 was 3.56 percent, according to Bankrate research. Your rate is barely above that. A refinance would cost you several thousand dollars in fees, so your savings would need to be significant enough to offset that. You didn’t mention the amount of your mortgage, but if your initial loan was for $200,000, your monthly payment is $912. Even if you were able to borrow $200,000 at 3.5 percent, your monthly payment would fall by only $14, to $898 a month.
Ed Conarchy of Cherry Creek Mortgage in Gurnee, Illinois, offers this advice to homeowners: ‘Do the math! I see so many people looking to refi because it is in the news, and friends and family are talking about it. But what they will save versus what they will pay is taking them many years to just break even. Too long, in many cases.’
The wisest strategy: Wait until you’re working again, and until rates fall further. In the meantime, know that you already have a very low rate.”
Q3: Should I turn 401(k) and 403(b) into Roth accounts?
I’m 71 years old and still working. I’m wondering if it’s worth it to turn two retirement funds — 401(k) and 403(b) — into Roths. Also, I really want to invest in the stock market. I need $20K to supplement Social Security and a pension. Annuities will cover only 10 years.
— ME Flynn
Answered by James Royal, senior investing reporter: “While the appeal of having tax-free income from a Roth IRA is nice, it probably doesn’t make financial sense. That’s because the conversion would likely create an immediate tax liability, reducing the amount in the account that’s available, rather than increasing it. These problems are complex and they depend so much on your financial situation, including your income and tax bracket. Your best course of action is speaking with a fee-only financial adviser who is a fiduciary, who can take a comprehensive look at your affairs and come up with a path forward.”
Q4: Retiring in 2021. How do we lock in our account balances?
I’m 64 years old, and my wife is 63. We plan to retire in September 2021. I have a 401(k), my wife has a 403(b) and together we have an IRA. This will supplement our Social Security income and my wife’s state pension. Based on the current account balances and projected Social Security income, we can support ourselves for the next 25 years of retirement, taking me to age 90 and my wife to age 89. How do I lock in my account balances so I do not lose any more in this uncertain future, or do I leave it as it is and hope things improve?
— Frank K.
Answered by James Royal, senior investing reporter: “You’re in a tough situation, without a question. On the one hand, you have to fund your immediate needs; and on the other hand, you want to make sure that you have money for the future, too. Negotiating this balance means that you probably need to have some investments in at-risk securities such as stocks, which tend to grow substantially over time. As you note, however, they may fall in the short term. So you want to leave enough funds in these high-return assets and let time increase their value. To this end, you might consider taking out enough money to last you for 12, 18, 24 months, and let the rest remain invested. You could put this cash in a high-yield savings account or high-yield CD, both of which are protected by the FDIC up to certain thresholds, and then access it as you need it. Time can give the market time to shake off the volatility and rise further.”
Q5: What’s the real deal with annuities?
Insurance companies have been really out in force the past few years promoting their index annuity funds that include a death benefit and payments like life insurance. Of course there are upfront costs and penalties for early withdrawal. Large lump sums are put into their accounts when you enroll. Of course they say many pros and not many cons, but how safe is the money really? What if they go under? You don’t lose when the market drops but are capped at the top end. And it seems they can change those variables as they wish.
— Carol K.
Answered by James Royal, senior investing reporter: “You’re sharply looking behind the curtain that the insurance industry wishes you wouldn’t. Annuities are full of downsides – huge sales commissions, significant restrictions, other fees for canceling the policy and the risk that the company fails, as you note. However, insurance companies are backed by state guaranty associations, which can help pay the annuity if the insurance company fails. But they don’t cover all annuities, so you’ll want to check into whether your proposed annuity and company is backed by one. Another good option is to check the insurance company’s rating with AM Best, and that’s available online. Stick with a highly rated firm, rated A or better. Finally, consider options other than an annuity. A fee-only financial adviser who is a fiduciary can offer you excellent advice and set up a plan that provides you annual income while you retain the upside of the stock market and bonds without paying a massive commission to the insurance company and being locked into an onerous plan. You’ll have much more flexibility that way and retain access to your cash if you need it, too.”