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My gut feeling tells me that before retiring, one should be as debt free as possible, but to be in that situation, I'd have to dig into my retirement fund. Currently owe ~25K in credit card payments (I have other payments but they are at ~3% interest). Is it advisable to knock that down to something like ~2K, thereby avoiding the ~20% interest or just keep paying down those high fees?

thanks in advance

Sam D
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  • Your gut feeling is correct but digging into your retirement fund to pay off that $25K credit-card debt without correcting the problems that resulted in you getting into that situation is not worth doing; in a very short time you will have $25K less in your retirement fund, and that credit-card debt will have gone back up from 0 to $25K again. – Dilip Sarwate Apr 08 '17 at 17:56
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    Oversimplify it for me: the correct order of investing goes a long way to help answer your question. – JTP - Apologise to Monica Apr 08 '17 at 18:56
  • It's pretty much impossible to invest your money in anything that will give a reliable return of 20% or more. Given that, if you invest the money, you will lose more money in interest than you will gain through the investment. – Simon B Apr 08 '17 at 20:53
  • @SimonB - well, perhaps, but the matched 401(k) may still win out. The question is whether the 20% debt can still be killed in a reasonable time. – JTP - Apologise to Monica Apr 09 '17 at 03:02
  • Thank you Joe Taxpayer , Dilip and Simon B. I think I will go with paying off that 25K in about a month; My wife and I have agreed that we will buy by credit and pay off within the same month as opposed to buy now and pay much later. – Sam D Apr 09 '17 at 05:00
  • @SamD A debit card is a great way to ensure that you don't roll over any balance. It just takes one overdraft fee to break the habit of "buy now, pay later". – D Stanley Apr 10 '17 at 13:29

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Having a large amount of credit card debt is pretty much always a financial calamity that needs quick remedy. The 20% interest you pay vastly outstrips what you can get with any kind of certainty in any investment. There are plenty of historical periods where investments have beaten 20%, even in a small amount of time, but often investments are flat or negative. Investment returns can't be counted on. As a rule, there is no question that paying off the credit cards is more important than investing.

Though, your question has one subtlety: The invested money is currently in your 401(k). Your age is not clear from the question. If you are not of age to be able to pull this out without paying a penalty, it's less clear that you should. Giving the government an immediate 10% penalty from your 401(k) plus the associated income taxes is a bad thing. If you are talking about borrowing from your 401(k), then that might be more reasonable, as long as you intend (and are able) to repay that loan in a reasonable amount of time.

I would say if you are borrowing from your 401(k) it's probably a good idea, if you are at an age in which you can withdraw penalty free it's a no-brainer, if you are thinking of taking the government penalty on that money, then you may want to explore other approaches.

It goes without saying that whatever you do to handle the immediate problem, you must also change the factors that caused the problem. If you wish to have financial security and good habits, get into the practice of paying off your credit cards completely every month.

farnsy
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  • Hi Famsy, et al. Thank you for your input. I am 65 and will retire in ~8 months; the money I plan to pay with comes from a retirement severance package, and from my savings... you know, -one of those 1.5% interest rates where the banks make a big hoopla about their 'generous' rates.

    Best regards

     – Sam D Apr 09 '17 at 21:25
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    Pay your credit card off, then. Congrats on your upcoming retirement! – farnsy Apr 09 '17 at 21:26