pay off debt before retirement

[albireo13]

I am 6 months away from retiring now. I have always been good about saving in tax deferred 401k. Now, we have built up some debt from home improvements we wanted to get done before retirement. Probably $25K+. My wife just passed 59-1/2 and wants to dip into her retirement savings to clear it. I think my plan is to dial back on my 401k contributions this last 6 months and help pay down all debt plus maybe build up a cash emergency fund.

This means just contributing enough to get company match, no more.
Sound like a good idea? I had thought about doing it before but have a hard time not saving.

 

[pjigar]

I would keep the 401K contributions to max out before retirement. Payoff debt in the NEXT tax year using 401K money since you most likely be in the lower tax bracket once you stop working. If tax brackets are same now vs after revetment then either way to pay off is fine. You make extra money equivalent to tax bracket difference by NOT paying the debt this year.

PS: Your way of thinking has a name for it in the behavioral finance called "mental accounting". Always look at all you incomes, expenses, assets and debts as a one giant pie rather break any of them up into smaller pies in your mind!

PS2: As pb4uski mentioned, to be completely objective, you also need to account for interest on debt and capital opportunity cost.

 

[pb4uski]

It depends.

What is the interest rate of the debt? What is the expected earnings rate of the investments that would not be made?

If you had to do you have sufficient liquidity to pay off the debt without any tax implications? If so, what does that liquidity earn?

 

[njhowie]

Work a few additional months, continue maxing out the 401k, and put your entire take home pay towards paying it off.

 

[ER2B]

We are in the same situation as my wife is joining me in retirement in 6 months. She increased her 401K contributions for next year from 30% to 40%. We want to be as close to the max of 26K by end of May 2020.

 

[albireo13]

the debt is mostly credit card, with some 0% payment plan. Also, this includes a bathroom redo we will do this Spring.

I should add that my wife will keep working another few years. Her salary is close to mine.
Since I will retire in 6 months, our total income for 2020 will drop by 25%. Will likely not pop into a lower tax bracket.

I could dip into my IRA to pay it off or pay it off monthly. I think it's mostly a wash, considering we are talking doing this over 6 months max.

In any case, I want to retire with our cash flow not being used for paying down debt.
We still have a good mortgage at 3.625% to deal with for years to come.

 

[rk911]

forget the math and pay off the debt as quickly as you can. my first choice would be cash from post tax account. or i'd postpone retirement rather than withdraw from a retirement account. all things are possible with no debt. ramsey is right on this.

 

[bingybear]

It depends.

What is the interest rate of the debt? What is the expected earnings rate of the investments that would not be made?

If you had to do you have sufficient liquidity to pay off the debt without any tax implications? If so, what does that liquidity earn?

+1


I would assume you (OP) had a plan when using a 0% CC on how you would pay off that card.


I view all my assets as retirement since I RE several years ago. However some of the assets I would pay a penalty to withdraw due to age. Thus I'm fortunate to have decent tax diversification.


OP.. what are your choices? Do you have good tax diversification?



I've find having a basic brokerage account ("taxable") is good for paying some needs.

 

[Rianne]

We simply avoid debt at all costs. Unless there's "0" interest. Actually, bought a new 2019 car that offered $1K off if we financed. I financed the full amount and paid it off in less than 3 months, first payment $21K. I paid less than $50 in interest. That was worth it. For the most part, if we can't afford it, we do not buy it.

 

[Bir48die]

I'm a no debt guy. Doesn't mean you have to be. With your wife working it changes the whole dynamic.

 

[Gumby]

forget the math and pay off the debt as quickly as you can. my first choice would be cash from post tax account. or i'd postpone retirement rather than withdraw from a retirement account. all things are possible with no debt. ramsey is right on this.

Dave Ramsey may be right for the run of the mill person who has trouble controlling spending, but his zero debt obsession is not right for everyone. I bought a new car in December 2017 for $20k. I was ready, willing and able to pay cash, but they offered me 0% financing for 63 months, so I took it. I have the current cash flow to easily make the payments and the money I have earned on the $20k over the past two years has been quite nice. I'm looking forward to another 3 years of 0% debt arbitrage.

By contrast, I bought another new car in June 2019. The best finance deal they were offering at that time was >3%, so I paid cash.

 

[OldShooter]

Moving money from your left pocket to the right has no effect on your net worth. Same-o for paying a debt with cash you have on hand. As @pb4 implicitly points out, the financial decision should be based on tax considerations and liquidity. The only financial goal that makes sense is to maximize your net worth at the end of the day, not to be "debt free."

But, as some have pointed out, maybe it is not totally a financial decision. Being debt free is a popular desire. So you also have to decide whether there are non-financial considerations you want to bring into the decision making.

No one can tell you what is right for you.

 

[Rianne]

Dave Ramsey may be right for the run of the mill person who has trouble controlling spending, but his zero debt obsession is not right for everyone.

I think Ramsey teaches no debt to people with debt for a reason. Most of the people who take the Ramsey path are in serious debt. There is something to say about the freeing effect of no debt.

Our church held his classes in the basement. I was surprised to learn of the many parishioners who I thought were "well to do" taking that class. I mean clothes, house, cars...high end. Taught me a lesson.

 

[Teacher Terry]

I would cut back on the 401 contributions. You want it paid off before you lose the 0% interest.

 

[W2R]

I wouldn't cut back on 401K contributions.
Also I wouldn't withdraw from your DW's retirement account.

Instead, I would LBYM much harder than I had been doing, and if necessary continue even after retiring in order to pay it off in a year or two or as fast as I possibly could.

I would probably have started doing this a few years ago, in order to not have to tighten the purse strings so much at the beginning of retirement. But from where you are now, that's what I would do, like it or not.

Oh, and next time I would save up the money first and *then* spend it. Bear in mind that this is my own personal way of handling things and others probably won't agree.

 

[COcheesehead]

I choose the debt free way. In retirement you will need less cash flow thus your need for achieving your income goals can be achieved with less market risk.

In the end the small difference I would have gained by keeping money at risk vs paying off debt (all mortgage) which wasn't deductible anymore either, made it an easy decision.

 

[Jimmie]

I agree with the vast majority in having no debt once retired. I promised DW I wouldn't retire until our last debt, mortgage loan, was paid off. Since we had hit our financial target end of 2018, I stopped the max 401K contributions for last 6 months of employment and put it all towards the mortgage. I paid it off same month as I walked off into retirement. It feels so great to enjoy retirement with the feeling of not owing anyone anything (except the normal stuff, e.g. taxes, insurance, utilities). Peace of mind was worth it in my opinion.

 

[Montecfo]

To me, paying off debt is an investment-type decision. Paying off non-deductible debt usually generates an above market "return" for that use of cash

Where will the money come from and what is it earning, after tax?

Though retired we still have a small mortgage at 2.68%. Planning to keep that in place for now

 

[RetiredAt55.5]

Moving money from your left pocket to the right has no effect on your net worth. Same-o for paying a debt with cash you have on hand. As @pb4 implicitly points out, the financial decision should be based on tax considerations and liquidity. The only financial goal that makes sense is to maximize your net worth at the end of the day, not to be "debt free."

But, as some have pointed out, maybe it is not totally a financial decision. Being debt free is a popular desire. So you also have to decide whether there are non-financial considerations you want to bring into the decision making.

No one can tell you what is right for you.

+1

If it makes the OP sleep a lot better at night not having any debt, pay it off. Just realize it's not always the optimal decision from a purely money perspective.

For an investor that doesn't want to do the trade off analysis, it's not a bad way to go. However, it is certainly not a "no brainer" decision. In my case, I retired at 55, only 5 years into my 30 year mortgage. I sleep at night like a rock.

 

[captain3d]

Loan payment, taxes or rent. All the same thing to me = Expenses. A paid off home still has many associated expenses that never go away. In other words ‘debt free’ is some what irrelevant.