Near retirement age is the worst time to raid 401(k)
Dear Credit Wise,
My husband and I are in our 50s. I have a good job with a good income. My husband's income is good but inconsistent. He is in construction and over 55 and hopefully close to retirement. We have approximately $26,000 in credit card debt and one more child ready to go off to college. Because of my husband's inconsistent income, it is very hard to pay our bills on time. Our credit is taking a beating. Every time it improves, something will happen and it drops again. I have $37,000 sitting in a frozen 401(k). I am thinking about pulling it out and paying the debt off. Getting rid of the cards and not using credit again. In addition, with any extra money I would put aside for emergencies. Thoughts? -- Need Relief
Dear Need Relief,
While I sympathize with your need for some relief, I would have to say that what you really need is a plan. The good news is that once you have a plan, relief should follow.
Let's talk about your retirement funds. I have said in my column before that raiding retirement funds to pay off debt is usually a bad idea due to significant tax consequences and the loss of compound interest. In your case, I would have to say that pulling out these funds to pay off your credit card debt would be a really bad idea. This is mainly because of your statement that your husband is "hopefully close to retirement." If that is truly the case, the last thing you should be doing is depleting retirement funds.
So what can you do?
Here is where having a plan comes into play. Having inconsistent income makes it difficult to plan and, as you have discovered, not paying your bills on time can have disastrous consequences when it comes to your credit. I would recommend that you contact a licensed, nonprofit credit counselor. Tell the counselor what you have told me and let them help you come up with a plan that will work for you.
A credit counseling session can be conducted in person, over the phone or even online, depending on what works best for you. An initial counseling session will take about 45 minutes to an hour to complete. The best counselors will start by asking you about your goals. Be sure to tell your counselor about your child about to go off to college, your husband's retirement hopes and any other goals you may have.
Your counselor will then go through a comprehensive interview/counseling session with you. This session will be very thorough and review all of your assets and income, and your fixed and variable expenses. The counselor should be able to offer suggestions for improving your budget. While saving a few dollars here and there may not sound like much, you may be surprised to find what a difference a small change to your monthly spending can make.
When it comes to your credit cards, agencies have the ability to do what is called a "soft pull" on your credit report. While "hard" credit inquiries from lenders can impact your credit score, a soft pull won't. This type of inquiry is for information only and will help the counselor see exactly where you stand with your creditors.
At this point, the counselor will talk with you about your options and strategies to address your situation. One solution might be a debt management plan that consolidates all of your credit cards into one monthly payment, often at reduced interest rates and payments. A debt management plan will allow you to pay your credit card debts at a more reasonable interest rate and will pay them all off within 60 months
A debt management plan is not your only option and your counselor will talk with you about other ways to take care of your debt. You certainly have the option of using your retirement funds, but you need to understand all of the consequences before doing so. Bankruptcy exists as a last resort, too. However, you will be better served to talk with a certified counselor from either the Association of Independent Consumer Credit Counseling Agencies or the National Foundation for Credit Counseling before you make a decision. The counseling session will give you clarity on all of the potential ways to proceed and help you build that educated plan I mentioned.
Be wise with your credit!
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