With stocks and bonds down, should I use retirement assets, such as a Simplified Employee Pension Plan (SEP) IRA, Roth or annuity, to pay down credit card debt? My stocks are down 15% to 20%, and my annuity is the only investment in the positive. I just turned 59 1/2. My debt is $240,000.
My first suggestion would be 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 portfolio. Although it is tempting, trying to coordinate your decisions with market behavior is ultimately a fool’s errand because you just cannot predict the markets.
With that concern crossed off our list, the core question becomes pretty straightforward: Should you pay off debt with your 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 are facing large amounts of high-interest debt, that may be an exception. Maybe. I cannot give a hard yes or no to your particular circumstance without more information, but I can at least give you an example of how to approach the problem. (If you have additional questions about repaying debt, this tool can help match you with potential advisors.)
Let’s imagine an investor who, like yourself, just turned 59 1/2 and is wondering what to do with a chunk of high-interest debt. For simplicity’s sake, assume he or she has $50,000 worth of credit card debt and:
- Makes $100,000 in taxable income.
- Has an IRA balance of $1 million.
- Pays 19% interest on the credit card.
With those factors in mind, we want to determine which of the following options for paying off that $50,000 will be least costly in the long run:
- A one-time withdrawal from the IRA.
- Monthly payments from income over three years.
And with that in mind, I ran a projection on the IRA balance with and without that $50,000 withdrawal.
Running the Numbers
If our hypothetical investor were to make that withdrawal now, then live to age 90, he would ultimately end up with almost $130,000 less than he would have otherwise.
Is that shortfall big enough to say the IRA withdrawal is not worth it? Well, to an extent, that is subjective. Since the hypothetical investor is starting with a $1 million portfolio, he might not mind having $130,000 less 30 years down the road.
On the other hand, that $130,000 is almost triple the original debt amount. And to go back to your real-life situation, the effect may be far more pronounced when trying to pay off a $240,000 debt balance, depending on the amount of 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 view of that, perhaps tapping the IRA is better than the alternative. For many, having a pile of present-day debt is more serious than being hypothetically less rich in the future. Especially if that debt charges 19% interest. (If you have additional questions about making a tough financial decision, this tool can help match you with potential advisors.)
Is getting rid of that debt now worth the price tag later? In the end, that is up to you and what you make of the results of your own number-crunching. The key is to know that price tag ahead of time 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
- Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Consider a few advisors before settling on one. It’s important to make sure you find someone you trust to manage your money. As you consider your options, these are the questions you should ask an advisor to ensure you make the right choice.
Graham Miller, CFP® is a SmartAsset financial planning columnist and answers reader questions on personal finance topics. Got a question you’d like 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 SmartAdvisor Match platform. Find more money insights from Graham at the Wiegand Financial blog.
Photo credit: ©iStock.com/fizkes, ©iStock.com/dragana991