Ask an Advisor: Should I Sacrifice Retirement Funds to Eliminate $240K in Debt?

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.

-William

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:

And with that in mind, I ran a projection on the IRA balance with and without that $50,000 withdrawal.

Consider speaking with a financial advisor to run your own numbers.

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. 

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