Should I drain my old 401(k) at age 30 to get a fresh start?[ Edited ]
Pros and Cons of Emptying a 401k at age 30 Scott, I am 30 years old and have a significant amount of unsecured debt, which almost doubles when you add that of my husbands. I have been trying to aggressively pay off my credit card debt (roughly 18k, down from 22k) for 2 years. I have created a plan that does not give much leeway by way of emergencies or any leisure, and if I stick to it we could be debt free in 3 years. My question is, at 30, would I be able to recover from cashing out a 401k from a previous employer that would net me 18k to pay off this debt or is it worth the 4k in interest to slowly pay off the cards. I want to be in a stable financial situation sooner than three years as we are planning for a house and children. It isn't that I have trouble paying my bills, but just too many to pay. Emotionally I feel that if I could eliminate it all and start fresh, I would obviously make smarter financial choices going forward, but will I suffer too hard financially when it comes time to retire in 40 years. If I did cash out the 401k, is there anything that I could do to put that money back, such as an IRA or something in addition to my current 401k?
No matter how you slice it, neither of these choices is terribly attractive.
Yuck and more yuck
Continue paying on the debt and you’ll incur thousands of dollars of interest expense before it’s all gone. You’ll also have the constant emotional burden of knowing how much you owe and how long it will take to get rid of it. Finally, you’ll undoubtedly face setbacks along the way which will likely make both of these points seem even worse. Not a very pleasant outlook, right?
Unfortunately though, draining your old 401(k) to eliminate these potential issues isn’t all peaches and cream either. I did a little number crunching to figure out just how much you’d be giving up in retirement by cashing out and here’s what I found. If you assume an 8% annual return for the next 35 years (purely hypothetical), and a current 401(k) balance of $24,000 (just guessing based on your belief that after taxes and penalties you’d net $18,000), you’d be removing about $355,000 from your retirement future account. If inflation runs at 3.5% per year until then (again, purely hyptothetical), that’s about $106,000 in today’s dollars. Granted, there’s no guarantee that these numbers will play out this way, but it they do (or if they work out more in your favor), you’re talking about sacrificing a whole lot of retirement money to eliminate your current pain. What’s worse, there’s no guarantee that cashing out this plan will put you on the perfect path to financial security. I’ve seen many people do what you’re considering only to land back in a similar position some point down the road but then with no money left to either bail them out or fund their retirement.
Is it worth it?
Am I being too dramatic here? I don’t think so. This is a huge decision that may appear simple on the surface but it’s not. The fact is it could have a significant long-term impact on your life – either positive or negative – so it’s not a decision to be taken lightly.
Now to be fair, I have seen people do what you’re considering and have it work out for them. It’s just not something I’d typically recommend. Ultimately, you have to do what you think is right for you but do so understanding that this is anything but a simple decision.
Oh, one last thing…you only have 60 days to put the money back after you take it from a retirement plan so that’s probably not an option for you here.
Thanks so much for your question. I hope this helps and I wish you all the best!