I was recently laid off from my job of 37 years. I am 56 years old. I don’t want to work, I want to retire. I have a company pension that I can take a lump sum of $500,000, or a monthly of $4,000, or even a partial lump & the rest of a monthly. I also have a 401k with $80,000 in it, & a severance of $36,000. I have $100,000 in debt. I want to cash out my 401k & use it & my severance to pay off the debt. Then with my monthly pension & my husband’s income with all the debt gone I can stay retired, not work & still have about $2,000 a month left to save etc. The problem is that every one I tell this plan to says I am nuts to cash out my 401k. Am I?

Since you are over 55, you will not have any penalty ( if memory serves me right) but you will have to pay taxes on the money you take out. So your 80,000 will only be about 60,000 net after taxes.

What is the interest rate you are makingon the 401 K, and what is the intreat you are paying on the loans.

But it does not sound like that bad a idea if your package and the net from 401 would pay off all of the debts.

If you did not have the company pension, then I would say no, but no debts and 4000 a month you should be fine

I don't know what the interest rate on the 401k is, I do know that two months ago I had $92,000 in it so I am losing $$$ every day. It was a company sponsored matched 6% 401k. The loans are a visa loan, personal loan, revolving loan, two car loans, all through my bank & 2 student loans & a few credit card loans. I am lucky I have the pension, thanks for the advice, I want to be debt free!

Yes, this sounds what I would do if I had that opportunity.

If your 401(k) is properly diversified and has a reasonable allocation between stocks and bonds, you should expect that the average return you will get is around 8% (assuming say 40% bonds and 60% stocks). Some years you'll do much better, and others worse. So the math says that if our debt is at an interest rate greater than 8% it makes sense to pay it off, even if it means cashing out some of the 401(k). However, you do have another option - you could take a $100K lump sum from your pension, which after taxes and combined wit the lump sum severance after taxes should be able to pay off your debts, and with the remaining $400K in your pension that would give you income of $3,200/month. The advantage to this is that your 401(k) keeps growing tax-deferred at 8% or so. At your age you need to plan out an income stream that will last 30 years, and if you rely solely on your monthly pension you may find in 10 or 15 years that after inflation the $2K/month you are counting on is not enough. You need to keep some money invested to educe the risk from inflation.

Thank-you, that is an option I had not thought of! I think I really only need to worry about the next 6 years as I am 56 now & when I turn 62, I can get my SS which will be about $1,700 a month.

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Originally Posted by Mscodie

I was recently laid off from my job of 37 years. I am 56 years old. I don’t want to work, I want to retire. I have a company pension that I can take a lump sum of $500,000, or a monthly of $4,000, or even a partial lump & the rest of a monthly. I also have a 401k with $80,000 in it, & a severance of $36,000. I have $100,000 in debt. I want to cash out my 401k & use it & my severance to pay off the debt. Then with my monthly pension & my husband’s income with all the debt gone I can stay retired, not work & still have about $2,000 a month left to save etc. The problem is that every one I tell this plan to says I am nuts to cash out my 401k. Am I?

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Hello,

First, pay off those debts as you described. Next, that 4k monthly pension (in lieu of a 500k lump) looks appealing if it has a survivorship option and you don't want to make your heirs rich when you die. Last, do not be greedy when investing your retirement dollars. It sounds like you'll have more than enough to be happy with a 5-6% return and you will be able to sleep at night knowing that your investments are secure.

I thought you had to be 59 1/2 to withdraw it and not incur the 10% penalty?

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Originally Posted by UK1997

I thought you had to be 59 1/2 to withdraw it and not incur the 10% penalty?

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No - if you are 55 and "separated from service" you can withdraw from your 401(k) without penalty. This is one case where the rules governing penalties for withdrawals from a 401(k) are less onerous than for an IRA.