Advice | Should you be using retirement money to pay off credit card debt? – The Washington Post | Vette Leader

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When your budget is tight and your debt burden seems insurmountable, it’s easy to view the money you’ve saved in your retirement account as a way out of a bad situation.

With inflation rising and consumer prices rising, Americans are increasingly turning to credit. Credit card balances are up $46 billion since the first quarter, according to the Federal Reserve Bank of New York’s latest Household Debt and Creditworthiness Report.

Credit card balances have grown 13 percent year over year since the second quarter of 2021, the largest jump in more than 20 years, the report said.

Other balances — which include retail cards and other consumer credit — rose $25 billion.

The New York Fed researchers also found a modest increase in arrears on mortgages, auto loans and credit card debt as lenders end forbearance programs put in place early in the pandemic.

Credit card debt is rising as inflation forces Americans to borrow more

The data reflects questions I received on my 1-855-.ASKPOST (1-855-275-7678) toll-free number. People are worried about paying off the debt they have been carrying around for some time.

A caller from Northern California wanted advice on how to get rid of $13,000 in credit card debt at 22 percent interest and another $7,000 in personal loans.

“I have a very good income of $121,000,” she said. “I have a meager $30,000 in my federal retirement account. Should I take the money from the federal retirement account that has been losing money lately?”

After speaking to the caller, who requested that her name not be released, I devised a plan for her.

Here is the background: She is 63 and has just received the balance of about $175,000 in student loans repaid through the federal government loan origination program. Before she called the toll-free number, she had already taken out a $10,000 loan from her savings plan, the state’s version of a 401(k). Her goal was to use part of the money to help her adult daughter who is going through some health issues. She spends about an additional $500 each month on medical expenses for her daughter.

My assessment: She should stop withdrawing money from the TSP.

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Here’s when to withdraw money from your retirement account if you’re not already retired: when there’s no other choice. You’ve used up all your non-retirement savings and exhausted other debt-free resources.

Then, as a last resort, you may have no choice but to tap into your retirement account. But keep in mind that if you’re under 59½ years old, you could be subject to a 10 percent early withdrawal penalty. And even if you’re not fined, you still have to pay income taxes on the money.

A retirement loan is slightly better than a payout. In a down market where your retirement portfolio takes a hit, it might make sense to use the money to pay off higher-yielding debt.

But in general, you should try to avoid borrowing from your retirement account. In better times, you could be missing out on compound earnings if the money had stayed in your account.

My advice: Since she had already borrowed money from her TSP, I suggested she set aside about $3,000 for a cash cushion and use the rest of the money to pay off the two smaller loans, which would free up $300.

And yes, I know their credit card debt is more expensive. But when getting out of debt, attacking smaller debts and erasing them often motivates people to become more aggressive when it comes to paying down their balances.

Are you ready to cash out your credit cards? Try the Debt Dash method. Image without caption

We briefly discussed whether she should apply for Social Security because she’s over 62. But if she plans to work a few more years, she shouldn’t be on Social Security until she’s at least reached her full retirement age of 66 years and eight months. If you’re under full retirement age year-round, Social Security deducts $1 from your benefit payments for every $2 you earn over the year limit. For 2022, that limit is $19,560.

I suggested she cut her budget.

I asked if she could cut some of her budget.

Her monthly rent of $1,000 is reasonable given her income.

I asked her to pull out her checking account statements for the past 12 months and go over them with a highlighter to find anything that could cut her from her monthly budget. Here’s what she found:

“Biggest items to date are Costco and the natural food store,” she wrote via email. “Last month I spent $683 on groceries and gas from Costco just for me. The month before I spent $1,000. I had a house guest this month.”

She can cut the cost of cell service, which is $190 a month for her and her daughter. “She has to get her own ministry when she starts working. I can possibly get what I need for $75 a month. That’s $115 saved there.”

She identified an additional $150 in savings by reducing her trips to Costco and health food stores each month.

There was another $40 if she canceled three streaming services. So it continued as we discussed other endowments to find the money to pay off their debts.

“It was nice to get down to the nitty gritty of my expenses,” she admitted.

I also encouraged her to call the credit card company and see what they could do to lower her interest rate or work with her on a payment plan that could accelerate her debt reduction. She has done so and is awaiting a response from the lender.

7 ways to reduce your credit card debt after the Fed rate hike

With a different set of eyes, the caller could see that she had options. If you think you need help, take advantage of free financial coaching and advice from America Saves (americasaves.org). Search for “Free Financial Coaching and Advice”. You can also get help from a nonprofit credit counseling agency by visiting the National Foundation for Credit Counseling or by calling 800-388-2227.

If you start with the premise that you shouldn’t touch that precious pot of money meant to carry you through your retirement years, you might find that you have other options as well.

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