Real Answers for Life’s Money Challenges

Im 61 years old and still working full time.

My job allows loans onour retirement plan.

I have just over $120,000 between my retirement and pension.

A retired woman sits on a couch while looking directly into the camera.

Not nearly enough to retire on, obviously.

Would it make sense to pay off all my debt of $10,000 from my retirement?

It wouldconsolidateeverything into one.

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The interest rate is about 5%.

Basically, Id be paying myself back.

S.

Dear S.,

I certainly get why a loan from your retirement plan looks tempting here.

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Youd get to eliminate your consumer debt in one swoop.

Plus, unlike with a 401(k) withdrawal, you dont pay taxes on a loan.

You acknowledge that you dont have enough saved for retirement.

The issue isnt just about how much youre paying in interest, but also the returns youre giving up.

you oughta keep the money you currently have saved invested and growing for as long as possible.

Thats an especially big drawback if your employer matches part of your contributions.

Thats free money youll be passing over for as long as the loan is outstanding.

Another risk of taking a loan from your retirement account comes if you leave your job for some reason.

(For people 5912 and younger, a 10% early withdrawal penalty would also apply.)

If you have good credit, you could look into whether adebt consolidation loancould lower your interest rates.

Doing so would lump everything into one loan, as you desire.

Otherwise, you might consider paying off your balances using thedebt snowball method.

This approach tends to be successful because every balance you tackle feels like a win.

You should also have a plan to repay the loan as quickly as possible.

That way, you might get back to contributing ASAP (and hopefully getting an employer match).

Fortunately, though, $10,000 is a relatively manageable amount of debt.

I think youll be able to pay it off without tapping your 401(k).

Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder.

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