Don’t use your retirement savings to pay off debt, especially if you don’t have a lot of debt or high interest rates.
Q: My wife and I are both 47 years old and we both have Roth IRAs that we are maxing out each year. We have a total balance between the two accounts of around $115,000. I have a 401k and 457 combined pension plan as well, and I am maxing that out and there is a balance of about $225,000.
My wife is a member of the teachers’ retirement for the state of Georgia and plans on retiring at age 50. At this time we do not see the need to have to use the Roth IRAs at retirement age to pay monthly expenses. We also have about $20,000 in the bank between savings and checking accounts.
We have no credit card debt and the only debt we have is a home equity loan and a newly purchased car loan. The car loan is a 1.9 percent rate for 3 years with a balance of $29,250.00 with the first payment starting Sept. 28. The home equity loan has a balance $29,350.
We took out the home equity loan in March 2009. It is a 15-year term at 5.35 percent. The original amount was $75,000, but we’ve been making an extra payments of $800 per month, so we’re paying this loan off quite quickly.
Should we continue making extra payments on either or both of these loans? Should we pull money out of our Roth IRAs to pay either one of these loans off? We want to do the right thing financially and we value your thoughts on this. Thanks in advance for all your help.
A: Clearly, you’re doing a great job managing your money and planning for retirement. You didn’t mention how much cash you’ll have each month in retirement, but between your pension and your wife’s teacher pension, you should both be in good shape. But on top of that, you still have plenty of cash. That’s good, too.
As for the two pieces of debt you have, it sounds as though you only have a home equity loan of less than $30,000 and a car loan that is almost the same amount. It just shows how throwing money at debt is the best way to pay it off quickly.
Your loan is so low now, that you probably shouldn’t do anything other than continue to pay it down quickly. Taking cash out of your IRA only makes sense if you don’t have it invested properly. But if it has been invested in a couple of stock index funds, that cash has probably been rising in value over the past few years. Cashing in some of that money will take away some of the forward momentum you’ve built, since you’re limited in how much you can contribute to a Roth IRA in a single year.
So, I wouldn’t want to pull money out of the Roth IRA for that debt or to pay off the car loan. At less than 2 percent, you’re really paying so little in interest. Almost every dollar goes to pay down the car loan balance. It’s nearly free money and you should enjoy paying it off slowly.
The one thing you don’t do is give yourself enough credit for everything that you’ve done right. You’ve got nearly $350,000 in your retirement kitty plus another $20,000 in the bank. You’ll be debt free within two or maybe 3 years (including the car loan) and that’s really something to be proud of, especially if you go into retirement at age 50.
Which is, by the way, the only red flag on the horizon I see. Fifty is really young to retire. You could conceivably have half of your life playing shuffleboard. What does your wife plan to do instead of teach? Are you also going to retire (think about medical insurance costs), move and do something else that’s different?
This plan doesn’t sound fully formed (though it might be) but it’s worth thinking it through and understanding how it will impact your finances today and in the future. Working another couple of years, perhaps to age 55 or even 60, would help you put two to three times as much cash in your retirement accounts and provide you with many more options. A fee-only financial planner (one that you pay by the hour to review your situation) can probably help.
I have a home equility loan of around $12,000. I beieve the intrest rate is around 4%. I do have a a low payment of only $75 mothly
My loan on my house is a little over $30,000, with monthly of $800. .
I have about $155,000 in thrift account with federal government. I will be retiring this week after 28 years-at age 61, 62 in May.
Question is, do I take money out of Home ecquity loan for dental work or additional money as needed?
Thanks Gary