With stocks and bonds declining, should I use retirement assets, such as a Simplified Employee Pension Plan (SEP) IRA, Roth, or annuity, to pay off credit card debt? My stocks are down 15% to 20%, and my annuity is the only investment in a positive direction. I just turned 59 1/2. My debt is $240,000.
-William
My first suggestion is to not make things more complicated for yourself than necessary. Specifically, I mean don’t worry about where the market is in relation to your investment portfolio. Although it is tempting, trying to coordinate your decisions with market behavior is ultimately a fool’s errand because you cannot predict the markets.
With this worry crossed off our list, The basic question becomes pretty clear: Should you pay off debt with your money? Individual Retirement Account (IRA) Or other retirement savings? (If you have additional questions about saving for retirement, This tool can help match you with potential advisors.)
Should you pay off debt with retirement savings?
In most cases, My answer would be “no”.“.But if you encounter large amounts of… High interest debtsThis may be an exception. maybe. I can’t give you a yes or no answer to your specific circumstances without more information, but I can at least give you an example of how to approach the problem. (If you have additional questions about paying off debt, This tool can help match you with potential advisors.)
Let’s imagine an investor, like you, who just turned 59 1/2 years old and is wondering what to do with a big chunk of high-interest debt. For simplicity, assume he has $50,000 worth of credit card debt and:
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Makes $100,000 of taxable income.
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He has an IRA balance of $1 million.
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Pay 19% interest on the credit card.
With these factors in mind, we want to determine which of the following options for repaying $50,000 will be the least expensive in the long run:
And with Which In consideration, I made a projection on the IRA balance with and without a $50,000 withdrawal.
Consider speaking with A Financial advisor To run your numbers.
Run the numbers
If our hypothetical investor made this withdrawal now, and then lived to age 90, he would do so He ultimately ended up with about $130,000 less than he would have otherwise.
Is this deficiency significant enough to say? IRA withdrawal Not worth it? Well, to some extent, this is subjective. Since the hypothetical investor starts with a $1 million portfolio, he might not mind having $130,000 in less than 30 years.
On the other hand, the $130,000 is nearly three times the original debt amount. Returning to your real-life situation, the impact may be more pronounced when trying to pay off a $240,000 debt balance, depending on how much savings you have to work with.
It is worth noting that, in the example, at least, the portfolio is still in the black at the end of the day. In light of this, perhaps exploiting the IRA is better than the alternative. For many, accumulating debt today is more dangerous than being less wealthy in the future. Especially if that debt charges 19% interest. (If you have additional questions about making a difficult financial decision, This tool can help match you with potential advisors.)
Bottom line
Is getting rid of this debt now worth paying for later? In the end, it’s up to you and what you do with the results of your number crunching. The key is to know this price in advance and make an informed decision. (If you have additional questions about saving for retirement, This tool can help match you with potential advisors.)
Tips for finding a financial advisor
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Find a financial advisor It doesn’t have to be difficult. Free SmartAsset tool Matches you with up to three vetted financial advisors serving your area, and you can interview your advisors at no cost to determine which advisor is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, Start now.
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Think about a few advisors before you settle on one. It’s important to make sure you find someone you trust to manage your money. When you consider your options, these are Questions you should ask the advisor To ensure you make the right decision.
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Keep an emergency fund on hand in case you encounter unexpected expenses. An emergency fund should be liquid – in an account that is not at risk of significant fluctuations such as the stock market. The trade-off is that the value of liquid cash can be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts from these banks.
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Graham Miller, CFP® is SmartAsset’s financial planning columnist and answers reader questions on personal finance topics. Do you have a question you want answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.
Please note that Graham is not a participant in the SmartAsset AMP platform, nor is he an employee of SmartAsset. Get more financial insights from Graham on Wiegand Finance Blog.
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this post Ask an Advisor: I’m $240,000 in debt, and my wallet is broken. Should I tap my retirement accounts to pay off credit card debt? appeared first on Smart Asset Blog.