I’m turning 65 soon, have $320,000 in retirement savings and a paid-off house, but I’m $46,000 in debt – should I get more money out of my investments?

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I will be 65 in a few months. I retired at 63 and currently receiving social security benefits for survivors (of my late husband). I plan to switch to my Social Security at age 70. I receive about $31,000 annually in Social Security. I also take $600 out of my retirement account each month.

I calculated all my monthly expenses (including what my health care 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’m left with about $500.

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

The bad thing is I have over $46,000 in debt (credit card, car and equity loan).

So I need advice On how to deal with this debt to get it paid off. I’m tempted to take more out of my retirement account each month and pay off my debt twice—instead of paying off a large portion all at once.

Any advice is so appreciated.

Thank you in advance for this consideration.

See: We’re 56, have $400,000 in debt, can save $50,000 a year, and just want to retire – what should we do?

Dear reader,

First: There are options that will help you pay off your debt, and taking a lump sum from your retirement accounts should probably be the very last.

Start by compiling a list of all your debts, the exact balances, the interest rates they charge, and whether there are any other stipulations (such as a TBEN to pay them off before interest rates rise). Once you have that, you can see where most of your debt is and create a payment plan.

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

Whether you need to withdraw more money every month is another story. However, this decision should be based on a number of factors, including your repayment plan (how soon are you trying to pay off this debt, or how quickly need to pay off this debt?) and how much more money you want to withdraw each month. You don’t want to drain your account too quickly – like I said, you need that money to last you the rest of your life – but you may have some room left on withdrawals.

If you only take $600 out of your retirement account each month, that’s a withdrawal rate of just over 2% — not bad. A long-standing guideline was the 4% rule. This rule would supposedly allow retirees to withdraw 4% of their retirement savings each year to pay for living expenses without running out of money before they die. That rule has been highly controversial in recent years, with some experts saying the percentage is too high.

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

Do not miss it: I am 63 years old, recently divorced and have $130,000 in debt. How will I ever retire?

If you only withdraw between 2-2.5% of your retirement savings each year, you have a little room to withdraw extra money to pay back your debts. For example, if you withdraw 3%, you will get an extra $200 for your debt. And when you pay off your debts, you can go back to a withdrawal rate of about 2% – maybe even less if you’re able and comfortable!

I would like to briefly mention a few things to consider when it comes to paying off debt, whether you are retired or not.

There are a few strategies for paying off debt. One type is the “snowball” method, in which consumers pay off debt in order of balances, starting with the smaller balances. Since each balance is squared away, the money used on 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’ll know where everything falls once you’ve made a list of your debts.

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Check out MarketWatch’s column “Retirement Hacks” for useful advice for your own pension savings

There’s also the “avalanche” method, which instead ranks debt based on interest rates. In this case, you pay the minimum amount for all other loans and put the extra money you have for debt repayments on the balances with the highest interest.

Zero interest credit cards can be an extremely useful tool, if you use them properly. These cards do have limitations. 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. You may also be charged for transferring your credit card balance from another card. But if you can plan accordingly, fit that fee into your repayment plan, and zap your debt within that time frame, you’ll save hundreds if not more in interest, paying off your consumer debt much, much faster.

Also call your lender if you make extra payments on debt for anything and make sure the money goes to principal, effectively lowering your balance. And just to be on the safe side, ask your lenders if there are any implications for paying off your debts faster… you don’t want to face a fine for doing something that’s right for you.

Do you have a question about your own pension savings? Email us at [email protected]

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