Most of us know that paying off debts before you retire will free up your disposable income, and it will make for a happier, more carefree lifestyle. Plus, paying years’ worth of interest on credit cards and other debts wastes an inordinate amount of money. And so, you might feel tempted to utilize a somewhat controversial method of paying off debts as your target retirement date approaches… But should you?
Yes, some soon-to-be retirees decide to use part of their investment funds to pay off debts before finally retiring. Whether or not this is a wise idea will depend upon the type of investment you’re accessing.
Let’s assume that a particular investment, for whatever reason, is not expected to perform well in the future. Meanwhile, you’re carrying high-interest credit card debts. It sometimes makes sense to sell that investment, free up your capital, and get rid of the debt. The key here is that what you’ll pay toward credit card interest in years to come is likely to exceed any returns you will receive from the investment.
On the other hand, it is often not a good idea to sell investments that you are holding in a retirement account for the purpose of paying off debts. That’s because you can incur fees for doing so. Plus, withdrawals from retirement accounts are taxed as income, and you risk bumping yourself into a higher tax bracket for that year.
Finally, the assets in your retirement account should be structured to provide reasonable gains over time. You want that money to last for the rest of your life, ideally, so taking a large chunk of it to pay down debts is often not a good idea.
As you approach your desired retirement date, continue to consult with us regularly. We can help you address topics like debt and retirement plan withdrawals, so that you can make the best decisions for your situation going forward.