Ask The Money Coach

Archive for the ‘Retirement Planning’ Category

Q: I have a question from a reader who wanted to know what she should do from a loan she received from her job.

“I requested and received a loan from my 403(b) plan to payoff credit cards. It was for $12, 800. I was told it would take 90 days to process, but the money actually came in five days. Now I am panicked. Should I send it back or use it?

Unfortunately the funds would have to be invested or re-invested at today’s market. I have a school loan too. I would have to pay back the loan to myself quarterly, which would reduce my $180 interest payments on the card. Please help. I know I should get rid off, or at least get rid off one debt. But what should I do?”

A: Well, first let me say, that you already had the loan processed. So no I don’t think you should go ahead and send it back. For my readers who don’t know, a 403(b) is essentially an equivalent of a 401k but the 403(b) plan is offered to others not in a corporate world but in a non-profit world.

This individual didn’t tell me where she works. She might even work for a hospital, or some government agency, but those are the entities that typically offer a 403(b) plans.

But essentially, they are employer’s sponsored retirement savings plan. Just like a traditional 401k plan is. Just like the 401k also, the 403(b) is plan where you pay yourself back the loan.

The challenge of course is that if you should leave your job for any reason, if you get fired, if you quit, when you have a loan outstanding, you are suppose to pay the loan back in 90 days or less. If you don’t, that money that you received, that will be dispersed to you, will be considered taxable income.

So, as long as you are not planning to leave and go anywhere and hopefully you won’t get axed or a pink slip, I wouldn’t worry so much about having taken the money out now to have to go pay off those presumably higher interest rate credit cards.

Pay the stuff off, save yourself the $180 interest payments on those credit cards, and then just get about the business of re-paying yourself.

You mentioned having school loans too. That’s a whole different ball game  with regard to your student loans, but what I will say to you is that, there are a number of options available to individuals that have federal or private school loans. And those options mostly deal with deferments, forbearance or loan cancellation.

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What’s your image of a happy retirement? Does it involve lazy days on a beach, traveling the world or pursuing a favorite pastime? Or maybe volunteering? Or are you finally planning to get to all those projects around the house that you’ve put off for years?

Whatever your ideal scenario, you’ll want to make sure you have the financial resources to support it. That doesn’t mean you need to be rich to be content — far from it — but it does mean that you’ll need to plan ahead for retirement and manage your money wisely once you get there.

Keep these five financial secrets in mind as you work toward your version of a happy retirement: Read the rest of this article on AARP.org,

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Q:  I’m 61 and Plan to Retire at Age 62, Though I Would Work Until 65 If needed. I would Like to Pay off a Few Credit Cards Using My 401(k). Is This a Wise Choice? I Have About $10,000 in Credit Card Debt.

A: I usually don’t like to see people use their 401(k) assets to pay off credit card debt because doing so shrinks a person’s retirement nest egg and most people face serious tax consequences by making early withdrawals from their retirement plans. In your case, however, you are already a year or two away from retirement, so it makes sense to aggressively pay down that credit card debt so that it’s not hanging over your head while you are working. Read on for more financial reasons why this is a smart strategy for you.

Tax Free Withdrawals

Also, only individuals who are under 59 ½ years of age have to pay tax on the amount withdrawn, plus a 10% penalty for making an early withdrawal from their 401(k) plans. In your case, however, since you are already 61 years old, you would not be subject to that 10% penalty, making the prospect of paying off your credit card debt an even more financially sound decision. In fact, there is an exception in the law that allows penalty-free distributions from your 401(k) provided you are 55 or older when you leave your job.

A Good Rate of Return

Lastly, paying down your credit card bills will generate an effective return rate that’s not likely to be matched by your retirement investing plan. In other words, you may be paying 15% or so interest rates on those credit cards. Therefore, that’s the return you’re essentially getting by paying off that consumer debt. Chances are your 401(k) is not earning 15% a year. So go ahead, feel comfortable in your choice to tap that 401(k) money and clear away that credit card debt. It’s a wise decision. Just be sure to manage you credit wisely in the future and avoid running up those credit card debts again during your Golden Years.

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Q: I am a 53-Year-Old Single Woman Who is Medically Retired. Between Disability and Retirement Income, I’m Living on About $24,000 a Year. I Have a Little Over $90,000 in Retirement Accounts. This is My Only Savings. I Have a Balance on a Business Credit Card of Close to $14,000. The Business Has Been Dissolved and I Want to Clear Up the Debt and Close the Account. My Only Way of Doing This is Selling Some Investments. Do You Recommend Doing This?

A: No, I don’t recommend taking $14,000 from your retirement accounts in order to pay off that business credit card. I would be wary of doing so for three reasons. First, you are medically retired, so you will not likely have any source of earned income for the rest of your life. Frankly, $90,000 is not a lot of retirement income to live on until death. You could live another 30 or 40 years. Also, if you sell some of those retirement assets, you’ll have to be capital gains taxes on them. Sure that’s just 15% (and possibly as low as 5% for people in the two lowest income tax brackets). But I want you to realize that your money will be taxed, meaning you may have to give over to Uncle Sam as much as $2,100 of the $14,000 you’re considering cashing in. Lastly, I’m not convinced that you can’t pay off this debt over time by making some adjustments to your budget. I know that $24,000 a year is not a lot to live on. But have you considered if you can cut any of your existing expenses (namely any luxuries you may be spending money on) and using that money instead to knock out the business credit card debt? I just don’t want you to tap into an already modest retirement nest egg and later regret not having that money to fall back on if times get even tougher or if you need the money for other purposes later in your retirement.

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