The headline for a personal finance column on The Washington Post website asked a simple question: “Should you use retirement money to pay off credit card debt?”
Here’s the simple answer: Absolutely not, unless you want to be working full-time or part-time into your 70s because you didn’t set aside enough retirement money. Michelle Singletary, the Post’s personal finance columnist, was a bit more charitable with her response. “Here’s when you should withdraw funds from your retirement account if you’re not already retired: when there is no other choice,” she wrote. “You’ve gone through all your non-retirement savings and exhausted other non-debt sources of assistance.” The topic came up when a 63-year-old California woman asked Singletary for advice. She wanted to eliminate her credit card debt of $13,000 (at a 22% annual interest rate) along with another $7,000 in personal loans. The woman earns $121,000 a year and already had borrowed $10,000 from her retirement fund. She also is giving her adult daughter, who has had health problems, $500 a month for medical bills. Singletary noted that borrowing the money from a retirement fund is usually a better option than withdrawing it, because you repay the fund over time — plus interest charges. She suggested that the woman set aside $3,000 of the retirement fund loan as a cash cushion, and then use the rest of the money to pay off the $7,000 personal loans. “I know her credit card debt is more expensive,” Singletary added. “But when getting out of debt, attacking smaller debts and wiping them out often motivates people to become more aggressive in paying down their balances.” The next step was for the woman to review a year’s worth of checking account statements, using a highlighter to mark any payments that could be reduced or eliminated. That was a big help. The woman estimated she could save $150 a month in groceries, up to $100 a month on her cell phone bill and $40 by eliminating some streaming TV services.
Singletary also suggested she call her credit card company to see if it is willing to reduce her interest rate or work with her to set up a plan that could speed up the payment of that debt. This story is a common one. Singletary wrote that with inflation at high levels, people are using their credit cards more often to defer bills. A recent Federal Reserve report on household debt said credit card balances have increased by $46 billion since the first quarter of this year. That means interest charges are increasing, too. The point is that help is available for people with large credit card debts. Singletary recommended the Free Financial Coaching tab at AmericaSaves.org; and nfcc.org, the National Foundation for Credit Counseling. “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 you have other options, too,” she concluded. Which is very good advice.