Financial Advice Needed
Among the several critical decisions I have to make in regards to my future (lack of) employment, there's also the option of cashing out my pension. Since I'm not retiring, I either have to roll it over into an IRA or cash it out.
Everyone and everything I read says DON'T DO IT! but I'm wondering if, in my case, I should.
The cons of doing so are basically:
A) I lose 20% because it's taxed as income
B) There's an additional 10% I must pay on my 2008 taxes
C) It's a large sum that I have set aside for retirement that I will no longer have.
So the mostly current value of the balance is reduced by 30%. In my case, we're talking about $2500 that I lose from my potential retirement fund.
But, here are the pros of cashing out, IMO:
A) It's about an additional $5k in my pocket right away that
B) I can apply to reducing my current credit card debt
As great the temptation is to take the $5k and go spend it on strippers & blow is, I would rather spend that money on reducing my debt. I plan to use a portion of my severance (which is about a 90% probability that this will be my final decision, rather than relocate or find a job in the stores) to apply towards my credit cards. Here's my reasoning
1. That amount is better served paying off debt at a higher interest rate than putting it in an IRA, which assumably would be at a lower rate than my credit cards.
2. Reducing my debt frees up income faster to re-invest in a 401(k) or IRA in the future.
Is it worth it to take a step back in my retirement fund to drastically reduce my current debt? I really want to start building my retirement account, but I don't think it makes sense to pass up this chance to pay down some credit cards, even if I am losing 30% of the value of the balance.
Any thoughts?
posted by Matt at
3:37 PM
3 Comments:
Matt,
I am usually not one to throw my credentials around like they mean something... having said that, here, I have to. I'm a CPA. I am not a financial planner but I have enough of a financial background to tell you not to do this. This will be THE single worst financial decision you can make. Not one of. THE ONE.
DON'T CASH OUT THE PENSION.
Your pros and cons actually don't list out the most critical factor. The time value of money and the tax effect. You mentioned that if you pay off your credit card, you can put more into your 401k what would have normally gone to your credit card payments. Except it's almost better if you kept your 401k to a minimum (only the amount your future employer will match) and put the rest towards debt, rather than cashing out your pension. This is mainly because if you have $5,000 in your pension, you can put it in the ROTH and invest in whatever. Let's say over the course of the years, you will average 8% return (historically, 8% is a VERY safe number). That's 8% compounding interest you are earning on $5,000 to start with WITHOUT the 30% penalty as opposed to if you take it out right now, you are losing 30% immediately (which means whatever "savings" you think you are getting out of paying off credit card is basically shoot to sh*t now) AND the earning power of your new 401k that you start funding will start from a few hundred dollars again. By the time you are 60, when you take this money, the difference won't be a few thousand dollars. It will be tens of thousands of dollars.
Don't make this mistake. It is financial suicide. It's like jamming into a pot with no fold equity for the opponent and you're drawing dead. Not even a one outer.
Seriously, I'll be more than happy to discuss this with you over email in more detail with actual numbers. You'll be shocked as to how much you will be hurting yourself.
Financial decisions have to be objective, not emotional. Don't cave into the silly satisfaction of being debt free.
Also, what's your APR on the credit card. With the rates being lowered, I guarantee you you can complain to the credit card company, b*tch to them and get a lower percentage. If you are paying them more than 9%, you are getting effed in the a hole.
Seriously, email me. We can talk.
By
Alan aka RecessRampage, At
February 15, 2008 at 7:00 AM
Cash it out. Proceed to Vegas. Find strung out Asian stripper with long nipples. Blow it all on lap dances. You know what I mean.
By
Anonymous, At
February 15, 2008 at 9:49 AM
Dude, I am so stupid. I am with Mark. Just call me before you go. I'll come along for the ride!
By
Alan aka RecessRampage, At
February 20, 2008 at 2:04 PM
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