Hi!

I’ll be 65 in a couple months. I retired at 63 and am currently receiving survivor Social Security payments (from my late husband). I plan on switching over to my Social Security at 70. I receive about $31,000 yearly in Social Security. I also take $600 each month out of my retirement account.

I calculated all my monthly expenses (to include what my healthcare costs will be at age 65) and subtracted this from my monthly Social Security payments and the $600 I get each month from my retirement account and I am left with about $500.

I have about $320,000 in a retirement account (investments) and my home is paid for and valued at approximately $250,000.

The bad part is I am $46,000+ in debt (credit card, car and home equity loan).

So I am in need of advice on how to handle this debt to get it paid off. I am tempted to take more each month from my retirement account and make double payments against my debt – rather than take a large chunk out at once.

Any advice is so appreciated.

Thank you in advance for this consideration.

Dear reader, 

First – there are options for you to pay off your debt, and taking a lump sum from your retirement accounts should probably be the very last of them. 

Start by compiling a list of all of your debts, the exact balances, the interest rates they’re charging and if there are any other stipulations (such as a deadline to pay them before interest rates rise). Once you have that, you can see where the brunt of your debt is, and make a repayment plan. 

There’s no one-size-fits-all approach to withdrawing more from your retirement accounts to pay off your debts. As with most personal finance issues, it all depends on individual circumstances. That said, taking a lump sum from your investments would likely be detrimental to your future retirement security, as the returns on your portfolio will be based on a smaller balance. You need that money to last you the rest of your life. 

Whether or not you should take out more money every month is another story. This decision should be based on a few factors though, including your repayment plan (how fast are you trying to pay this debt down, or how fast do you need to pay this debt down?) and how much more money you intend to take every month. You don’t want to dwindle your account too quickly – like I said, you do need that money to last you the rest of your life – but you may have some room to spare in withdrawals. 

If you’re only taking $600 out of your retirement account each month, that’s a withdrawal rate of a little more than 2% – not bad. A longstanding guideline was the 4% rule. With this rule, retirees could supposedly withdraw 4% of their retirement savings every year to pay for living expenses without running out of money before they died. That rule has been highly contested in recent years, with some experts saying that rate is too high.

Investment firm Morningstar said in an analysis published in November that retirees would be better off with a rate as low as 3.3%, assuming their portfolios were balances and withdrawals were fixed over the next 30 years. With those variables, retirees would have a 90% probability of not running out of retirement savings.

If you’re only taking out between 2-2.5% of your retirement savings every year, you do have a little room to take extra cash out to repay your debts. For example, withdrawing 3% would give you an extra $200 to put towards your debt. And when you do repay your debts, you could go back to a withdrawal rate of around 2% – maybe even less if you’re capable and comfortable doing so!

I just wanted to briefly mention a few more things to keep in mind when it comes to paying off debt, whether you’re in retirement or not. 

There are a few strategies to pay off debt. One type is the “snowball” method, where consumers pay off the debt in the order of the balances, beginning with the smaller balances. As each balance is squared away, the money used for that debt is applied to the next highest balance. Credit cards typically have the highest interest rates, and home equity loans are generally low, but you will know where everything falls when you’ve made a list of your debts.

There’s also the “avalanche” method, which prioritizes debts by interest rates instead. In this case, you’d pay the minimum amount on all the other loans and put the extra cash you have for debt repayment towards the balances with the highest interest rate. 

Zero-interest credit cards can be an extremely useful tool, if you use them right. These cards do have restrictions. For example, the zero-interest offer is only available for a limited time – ie. 15, 18 or 24 months – before a high interest rate kicks in. There may also be a fee to transfer your credit card balance from another card. But if you can plan accordingly, fit that fee into your repayment plan and zap your debt in that timeframe, you’ll save hundreds if not more on interest, thereby paying off your consumer debt much, much faster. 

Also, when making extra payments towards debt for anything, call your lender and make sure that money is going towards the principal, which actually reduces your balance. And, to be on the safe side, ask your lenders if there are any repercussions for paying off your debts faster… you don’t want to be hit with a penalty fee for doing something that’s good for you.