Should I sacrifice retirement funds to eliminate $240,000 in debt?

With stocks and bonds down, should you use retirement assets, such as a Simplified Employee Pension Plan (SEP) IRA, Roth, or annuity, to pay off credit card debt? My stocks are down 15% to 20% and my annuity is the only positive investment. I just turned 59 and a half years old. My debt is $240,000.

-William

My first suggestion would be not to complicate things more than necessary. Specifically, I mean don’t worry about where the market is in relation to your portfolio. As tempting as it may be, trying to coordinate your decisions with market behavior is ultimately foolish because you simply cannot predict markets.

With that concern crossed off our list, The central question becomes quite simple: Should you pay off your debt from your individual retirement account (IRA) or other retirement savings? (If you have additional questions about saving for retirement, this tool can help you find potential advisors.)

Should you pay off your debt with retirement savings?

In most cases, My answer would be “no.”.” But if you’re facing large amounts of high-interest debt, that may be an exception. Maybe. I can’t give a resounding 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 paying off debt, this tool can help you find potential advisors.)

Imagine an investor who, like you, just turned 59 and a half and is wondering what to do with some of his high-interest debt. For the sake of simplicity, let’s say you have $50,000 worth of credit card debt and:

• Generates $100,000 in taxable income.

• You have an IRA balance of $1 million.

• Pay 19% interest on the credit card.

With those factors in mind, we want to determine which of the following options for paying that $50,000 will be least expensive in the long run:

and with that In mind, I made a projection about the IRA balance with and without that $50,000 withdrawal.

Consider talking to a financial advisor to do your own numbers.

Running the numbers

If our hypothetical investor made that withdrawal now and then lived to be 90, Ultimately, you’ll end up with almost $130,000 less than you would have otherwise.

Is that shortfall big enough to say the IRA isn’t worth cashing out? Well, to some extent, that’s subjective. Since the hypothetical investor is starting with a $1 million portfolio, he may not mind having $130,000 less in 30 years.

On the other hand, that $130,000 is almost triple the amount of the original debt. And getting back to your real-life situation, the effect can be much more pronounced when you’re trying to pay off a $240,000 debt balance, depending on how much savings you have to work with.

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