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Should one use 401k
Old 06-28-2020, 03:55 AM   #1
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Should one use 401k

My brother in law is looking to retire this year in September. He says he can’t take going to work any more. He and my sister have $60,000 in debt. She will continue to work, but he’s considering using his 457 account of $70,000 to clear out the debt so he won’t have any debt and he’ll have his pension and social security which is enough to cover their mortgage which I believe will be paid off in a few years according to my sister, and the monthly bills. I tried to explain to him he will have to pay regular income tax on the withdrawal’ plus he will be in a higher tax bracket because of that withdrawal. However, that doesn’t seem to be his concern. There debt is credit cards, car loans, and personal loans.

My sister is very concerned because there will now be no cushion if needs be.They’ll use her money from work to save and for entertainment. It’s just the two of them with no other responsibilities.

Any thoughts on this? I can definitely see some benefits, for them doing it, but they’d have no cushion or emergency fund. He’s a few years older than me at 65 so I guess he’s just had enough.
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Old 06-28-2020, 04:42 AM   #2
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Perhaps they could pay off the highest interest debt, and leave a little in reserve.
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Should one use 401k
Old 06-28-2020, 05:02 AM   #3
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Should one use 401k

Debt can be really cheap right now. What are the rates on the debt they have? If the 457 balance was many multiples of the debt it might be OK but with so little left over maybe look at a HELOC or other source of cheap debt, even a 401k loan could be considered I. This case. Also very important to know that new debt will nor replace the existing debt due to lifestyle behavior.
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Old 06-28-2020, 05:52 AM   #4
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Egad, it sure looks like they are nowhere close. "credit cards, car loans and personal loans" of debt, with low total savings, points to a life of financial carelessness. Considering retirement in this scenario is another indicator of someone who doesn't fully comprehend financial basics. This is not a judgment of the BIL, just my belief.
OP: If he already made the decision, you may as well just bite your tongue. But if BIL is asking your advice, strongly suggest he continue working until - at the very least - those 3 loan categories are paid down to zero. Otherwise, that debt will recur as soon as they need the next shiny new car.
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Old 06-28-2020, 08:39 AM   #5
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Continue working at 65 is a lot better than having to go back to work at 70. I think that is what's going to happen here.

Allowing consumer debt and mortgage to last to 65 of age is very alarming. They are going to lose their house with any major surgery and anxiety from finances will become the common theme of the household. Impulse decisions led them to this point and will likely continue to rule their lives regardless what you say.

With the economy going down, the hardship is going to be more obvious in the next 5 years. My only suggestion is to keep working until all debt is cleared, their mortgage is paid off, and have at least a 100k for emergency fund saved up ( not too much to ask to support two people and they probably already have it from their 401k).
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Old 06-28-2020, 10:33 AM   #6
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Originally Posted by jazz4cash View Post
Debt can be really cheap right now. What are the rates on the debt they have? If the 457 balance was many multiples of the debt it might be OK but with so little left over maybe look at a HELOC or other source of cheap debt, even a 401k loan could be considered I. This case. Also very important to know that new debt will nor replace the existing debt due to lifestyle behavior.
Im not sure of the rates, but we all know credit cards rates are high. I too worry about new debt with him. He doesn’t seem to have the discipline to stop buying. Maybe he’ll not buy as much since he knows his income is fixed.
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Old 06-28-2020, 10:47 AM   #7
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Egad, it sure looks like they are nowhere close. "credit cards, car loans and personal loans" of debt, with low total savings, points to a life of financial carelessness. Considering retirement in this scenario is another indicator of someone who doesn't fully comprehend financial basics. This is not a judgment of the BIL, just my belief.
OP: If he already made the decision, you may as well just bite your tongue. But if BIL is asking your advice, strongly suggest he continue working until - at the very least - those 3 loan categories are paid down to zero. Otherwise, that debt will recur as soon as they need the next shiny new car.
It’s mainly my sister who shares this information with me. She would like for me to sit down and talk with him. She says he respects my opinion. I’ve been hesitant because you know how our male egos can be. I don’t want to possibly hear, “Mind your own business!”

I’m thinking he should work until he gets his social security.which I think he gets around 66 or 67. Apparently his pension will be able to cover all their living expenses. It’s just the I foreseeable that’s the problem in my opinion.
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Old 06-28-2020, 11:13 AM   #8
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Just a few thoughts:
These folks are pretty wasteful of money and dumb with financial issues. It might be one of them is really bad and the other just goes along with it as everything is ok for now.

People get information from all over, so if all they hear is: "you deserve this new X" , or "borrow now" that is what they will do as it's a natural tendency to want more.

Talking to the BIL might at worst result in no better action, if BIL resents OP for the talking that is actually a benefit as it will make BIL less likely to ask OP for a loan in a couple of years.

If BIL pays off all the debt, watch and in a few years they will again have a huge debt, it didn't come from magic, it came from spending and spending.

Maybe BIL could sell some stuff, surely they have a bunch of useless cool "toys" lying around that caused this debt.

Somehow BIL is magically thinking there is no tax to the withdrawal, another sign of poor financial thinking.

Maybe they should declare bankruptcy, the retirement savings is protected as is probably their home. So it might cost very little.
Or negotiate with CC to freeze debt and credit cards and pay down over few years interest free.
Of course BIL would have to admit to spending like a drunken sailor and that "pride" issue could be a problem.
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Old 06-28-2020, 12:26 PM   #9
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Quote:
Originally Posted by Carlos2 View Post
My brother in law is looking to retire this year in September. He says he can’t take going to work any more. He and my sister have $60,000 in debt. She will continue to work, but he’s considering using his 457 account of $70,000 to clear out the debt so he won’t have any debt and he’ll have his pension and social security which is enough to cover their mortgage which I believe will be paid off in a few years according to my sister, and the monthly bills. I tried to explain to him he will have to pay regular income tax on the withdrawal’ plus he will be in a higher tax bracket because of that withdrawal. However, that doesn’t seem to be his concern. There debt is credit cards, car loans, and personal loans.

My sister is very concerned because there will now be no cushion if needs be.They’ll use her money from work to save and for entertainment. It’s just the two of them with no other responsibilities.

Any thoughts on this? I can definitely see some benefits, for them doing it, but they’d have no cushion or emergency fund. He’s a few years older than me at 65 so I guess he’s just had enough.
It seems to me that if he wants to do this that he would be better off to wait until January 2021 as with him not working the tax-cost of the 457 withdrawal will be lower in 2021 because they will have less income because he will not be working.
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Old 06-28-2020, 03:58 PM   #10
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Ugh. Is he asking for opinions, or is this channel of communication coming through his wife?

I was once tempted to empty out my 401(k) to erase my debt. Aside from the obvious tax (and for me, penalty) hit, the biggest risk is that a "quick fix" to a debt wipeout could easily lead to more debt if one didn't actually fix the root cause of the problem, which is getting into debt in the first place. I took action to pay it off over 5 years and am glad I did.

But his situation is more immediate because he wants to quit working entirely.

I'm kind of reading that he may not be soliciting opinions and the wife may be the one fretting. It may take some finesse to avoid being contrary while showing him another path to what he wants. pb4uski's suggestion of waiting until 2021 would save a fair bit of tax money, so there's a start. And maybe by then he'll have had time to think over the situation after detoxing from work.
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