Should I Pay Off Debt With My Retirement Fund?

Credit & Debt, Living & Spending, Retirement & Investing
on November 13, 2012

As retirement age creeps a little closer, it is only natural that you should think in terms of reducing the amount of debt that you are still carrying when you retire from the workplace. Given the specifics of your income and general economic condition, there may not be an opportunity to completely settle those debts before retirement. While you know if is possible to withdraw a certain amount from your pension or other type of retirement fund, you are not sure this is the best way to go. Before you do anything, it is important to consider the pros and cons of this particular solution.

What is the Interest Rate on Your Debt Versus the Interest on the Fund?

One key consideration has to do with the amount of interest you are paying on your current debts versus the interest the balance of your retirement account is accruing over time. If the interest rates on your debt obligations is significantly less than the interest rate applied to the fund, then withdrawing funds to pay off those debts will actually cost you money in the long run.

On the other hand, if the interest rates on your current debts are much higher on average than the interest you are earning from the pension or retirement fund, choosing to withdraw the funds and pay off the debts would be a way of saving money. The money you save from no longer having to pay those higher interest rates will actually make it easier to enjoy a higher standard of living once you retire.

The Comfort Factor Matters

Another aspect to consider is how withdrawing those funds now would affect your life after retirement. Take the time to project what would happen if you chose to take this action. You may find that getting rid of the debt will mean fewer monthly obligations to meet, something that would simplify your finances considerably. While this also means that you would draw less funds from the retirement plan each month, make sure you would still have enough income to maintain an equitable lifestyle. If this is the case, it may be worth it for no other reason than having those debts paid in full and off your mind forever.

A Working Retirement?

What you plan on doing with the retirement years is also something you should consider before withdrawing anything from your retirement fund. Perhaps you plan on spending time traveling and enjoying the years you have left. Maybe the idea is to jettison your somewhat busy career and find something you can do for a few hours each week. In the latter scenario, you are essentially creating another small source of income while still allowing you plenty of time to do other things. With this approach, you could leave your retirement fund as is and use the money from the part time job to pay off those debts in a timely manner. Once the debts are settled, the proceeds from your part time work will make saving money easier, since that funds are essentially money above and beyond what you need to remain comfortable.

There is no one size fits all solution when it comes to using retirement funds to settle current debts. Take the time to determine how you would be affected by choosing to make the withdrawal. If the benefits tend to outweigh any disadvantages that you see, then this approach is well worth considering.

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