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May 9 2011 12:00AM

Question


I am currently unemployed and coming to the end of my severance pay. My wife’s salary cannot cover our expenses. I currently have about $27,000 in my retirement account and about $25,000 in credit card debt. Should I cash out my retirement account to pay off the debt and worry about retirement later?

Answer


FPA member Tom Zimmerman, CFP®, of Zimmerman Wealth Management, LLC, said the following: “First, I am obliged to issue this disclaimer: since this Q and A format does not allow for complete data about you to be gathered, many alternatives have not been considered and a financial planning engagement has not been established."

That being said, Zimmerman offered the following guidance: “What will your new reality look like? Can you make the cuts necessary to keep your financial heads above water? Can you pay off the debt and not accumulate any more credit card debt? Do you have a mortgage, and if so, what are the prospects?

“My point is this: if you can pay off the credit card debt, then live within the means of your new reality without incurring any more debt and stay in your home, then pay off the debt.

“However, if you are using the retirement funds to forestall a greater day of reckoning, then hold onto the retirement account and deal with everything now. Please remember that most retirement accounts cannot be attached in bankruptcy proceedings, if it comes to that.”

“I sympathize with you and your family on this financial concern,” said FPA member Will Taylor, CFP®, of Farmers & Mechanics Bank. “While you have made a good decision in asking the opinion of the FPA, I must encourage you to take further steps in reaching the best decision. It is very hard to provide you with the correct information in your particular situation without gathering more information.

"Additional information needed may include the following:

  • What are your ages? There are tax consequences for taking retirement funds early, which may include a penalty.
  • What are the prospects for future employment? 
  • What does your current cash flow look like and is there room for adjustments? 
  • What are your spending habits and nearby cash needs? 
  • What other assets do you and your wife have? 
  • When do you plan on retiring and is there potential for future savings? 
  • What additional liabilities do you have? 
  • What is your current tax rate?

“These are just a few of the questions that will need to be answered. I encourage you to find a financial planner near you to help you. Visiting with a financial planner will help give clarity to your entire financial situation and future.”

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