401k Poll Would you, could you??!!!

[cstraub]

My DBIL just told us that he is going to dig into his 401k to pay off his debt. They have been carrying around about $45,000 in debt for a couple of years. He told us that he is on anxiety meds because he does not see himself paying down the debt anytime soon and the $500 in intrest each month is killing him. He makes over $100,000 a year but still can not get things under control.
His wife has talked him into digging into the 401k this once just to get on top of everything. It will basically take him $100,000 to pay off the $45,000.

We were completly shocked and did not know what to say. Of course we showed support but I couldn't help but think all the while I would post a poll on the DIS to see what you guys thought.

So what do you think?

 

[dvcgirl]

I think DBIL and the wife need to learn how to live beneath their means using a budget. That will relieve the anxiety. Paying off major consumer debt with money from your 401K is a sure fire way to never retire.....and you get killed in taxes and penalties for your efforts. I never like it when people use home equity or retirement money to pay off CC debt. It doesn't change the behavior....living above your means.

 

[Donald is #1]

I definitely would not cut into the 401K. They will just put themselves into more trouble because they will jepardize (spelling?) their retirement. They would be better off to cut expenses and put that extra money towards the debt. Another idea would be if your DBIL is putting more into his 401k than the percentage that the company matches, then he may want to cut back to just putting in enough to get the full company match and then to take that extra money towards the debt.

 

[MrsPete]

My first reaction is NO.

401K money is put away for retirement, nothing else, or at least nothing short of an emergency. Since it'll cost him more than double the debt to use this money, and it'll take him quite some time to replace this money in his 401K, this is a very, very expensive way to get rid of the debt. He's talking about using a year's salary -- a year of his life -- to get rid of this debt.

On second thought though, I have questions . . .

What other options does he have to rid himself of this problem? Could he take on a second job temporarily? Does his wife work? Could they together do something on ebay? Could he cut back on 401K contributions and avoid touching what's already there?
Is he genuinely doing everything he can to pay off the debt in his current situation (i.e., cooking at home, keeping his cars a while), or is he saying he wants to get rid of the debt while continuing to spend (i.e., spending sprees at the mall, then whining that there's no money for the power bill)?
How'd he incur the debt? Is it a result of poor spending habits that are likely to resurface once he's "stable" again?
How old is he, and how stable is his job? How many more years does he expect to work before retirement?
If he were to lose his job, how difficult would it be for him to find work again?

The thing about anxiety meds is disconcerting -- this debt is taking a toll on his life and his health. Has he always been a worrier, or is this something new? If he's THAT concerned, perhaps it would be good to get rid of the problem once and for all --at any cost.

I don't know, but I lean towards this being a bad idea.

 

[branv]

I didn't select either one because they were too black and white for me to choose one. I would say in almost every circumstance no. If something happened where one of us couldn't work or couldn't FIND work, and we had used up our savings, I would do it to avoid foreclosure until I could sell my house. And of course, god forbid, if it meant going without shelter or food.

But I would never do it to bail us out of squandering money. Sadly, SO many people who borrow, whether from banks, 401K or friends/family to pay off debt haven't learned a thing. And pretty soon, they're right back where they started. It seems to be that your BIL and his wife need to make more that just plans on how to pay this off - they need to make plans on how to never get to that place again. I feel for him, it can happen to even the best of us...we all have temptation in some area, his has just cost him a great deal.

 

[minkydog]

Before I would dig a huge chunk of (irreplaceable) money out of my retirement I would seek every other option available: credit counseling, bankruptcy, extra job. He's right--if he's got half his yearly income in debt and is paying $500 in interest alone,he's in way over his head. He's going to have to do something to staunch the hemorrhaging--fast. But bleeding out his 401K is only going to postpone the pain until a more difficult time. When he gets to retirement and not only doesn't have the $100,000, but doesn't have all the lovely interest it would have earned and no way to make more money, he's going to be wishing he'd made another choice.

There are no loans for your old age. Unless there is catastrophic illness or some other really terrible thing going on I would take hands-off the 401K. Find another way to pay off the credit cards & house & the SUV

 

[cstraub]

Thanks everyone for your replies so far. I don't know the answer to alot of the questions that have been asked because we did not want to ask DBIL ourselves. It was hard for him to even tell us what he did tell us.

They do drive modest cars- no SUV's, have a slighly above average home and really don't live all that lavish in general. I think they only take one vacation a year. I think when they moved into their house 5 years ago they bought a lot of furniture and upgrades for the house.

DBIL is not really worrier in general and I think he is doing all he can do to pay down the debt. DSIL does not work as she stay home where their young children.

I just still can't believe that they are in this mess. I thought everything was fine. It just breaks my heart to see DBIL suffering so much because fo the debt. I asked him if he could not maybe look as his debt as a new BMW that he is trying to pay off or something like that. He just can't. I'm really worried about him.

Thanks!

 

[trvlnut]

I think he should contact his CPA and ask for help in setting up a budget. If it takes having the CPA dole out money to him, then so be it.

To answer the question. No. No way. It's going to cost him $55K to pay $45K in debt. Instead of paying off $45k plus interest (which won't come close to $55K), he's going to pay $100k. Yeow... I am shocked that anyone who think of doing this unless he was going without food and shelter. Even then, I would really try other measures like selling cars, going without cable even moving to a lower priced home or renting. Is a second job out of the question?

 

[cstraub]

I'm going to show him this thread. Everything everyone is saying makes perfect sense.

Anyone know how long it would/should take him to pay it off? I think he makes 130,000 to 150,000 per year. I beleive that is somewhere around what he makes. Like I said they have older modest cars and I would guess there house to be around $250 or so.

I think if they had a goal maybe that would help his anxiety. I don't think they want to seek any outside help because they are embarrassed about the whole thing. We are the only ones he has told.

He's a great guy. I just think he has let his family buy things to make them happy.

 

[crisi]

He might need to have his meds adjusted. It may be possible for his therapist to recommend a behavioral specialist in financial issues. If he just got on the medication, he should wait to do anything for two weeks, anti-depressants and anti-anxiety drugs don't usually work overnight.

Before he cashes in his 401k, he needs to explore his other options. Including the one where he wife takes a job on Saturdays. I suspect, from talking to other men with stay at home wives, that at least part of his financial anxiety stems from the stress of being a sole breadwinner with kids in a world where no job is secure. "What will happen to my kids if I get laid off" can cause a lot of anxiety when you have no debt. He should also talk to a CPA before cashing out the 401k - there may be ways to do that which have less consequences.

I'm no Dave Ramsey fan, but he's turned thousands and thousands of financial lives around.

 

[cstraub]

He might need to have his meds adjusted. It may be possible for his therapist to recommend a behavioral specialist in financial issues. If he just got on the medication, he should wait to do anything for two weeks, anti-depressants and anti-anxiety drugs don't usually work overnight.

Before he cashes in his 401k, he needs to explore his other options. Including the one where he wife takes a job on Saturdays. I suspect, from talking to other men with stay at home wives, that at least part of his financial anxiety stems from the stress of being a sole breadwinner with kids in a world where no job is secure. "What will happen to my kids if I get laid off" can cause a lot of anxiety when you have no debt. He should also talk to a CPA before cashing out the 401k - there may be ways to do that which have less consequences.

I'm no Dave Ramsey fan, but he's turned thousands and thousands of financial lives around.

Great point about being the breadwinner! I'm going to have him read this today. Maybe he can ask his wife to get a small job which may help ease his anxiety.

 

[corndog]

You have to look at it rationally, not just immediately say that it's bad to touch your 401k. Sure it's bad, but it sounds like the debt situation may be worse. You just have to ask one simple question to know whether it's the right thing to do:

With the money he's going to take out of his 401k to pay his debt, will he earn more the money invested than he would save by paying the debt?

If Yes, then don't cash out.
If No, cash out.

Sure, it's not the situation he wants to be in, but the fact is that's where he is now and you have to make the best decision for the situation you are in, not the situation you wish you were in.

 

[Lucky4me]

They need to read Dave Ramsey or Suze Ormon, both good solid financial advice. Suze deals with the psychological aspects of money which is very interesting.
He needs to stop equating things with love. His family can live without the newest, biggest and best toys. It's time to get tough. Taking a dime from his 401k will be a huge mistake.
This is all a mindset and once you are in it, it's easy to pay off debt and save.
I've been doing it for 13 years and haven't missed out on anything. We have no consumer debt, a nice savings account, our house almost paid off and our 401k is not too shabby either. All this on about half of what your bil makes.
Before we started conciously budgeting, we were up to our ears in cc debt and were living paycheck to paycheck. Like I said it's not about sacrificing, just making up your mind it's what you want.

 

[cstraub]

You have to look at it rationally, not just immediately say that it's bad to touch your 401k. Sure it's bad, but it sounds like the debt situation may be worse. You just have to ask one simple question to know whether it's the right thing to do:

With the money he's going to take out of his 401k to pay his debt, will he earn more the money invested than he would save by paying the debt?

If Yes, then don't cash out.
If No, cash out.

Sure, it's not the situation he wants to be in, but the fact is that's where he is now and you have to make the best decision for the situation you are in, not the situation you wish you were in.

Do you mean like taking the $500 he is paying in intrest and investing it versus the $55,000 out of the 401K that it will cost him? Is there a formula to figure out which would be the best?

 

[MrsPete]

DSIL does not work as she stay home where their young children.

There's the answer. SHE is the untapped resource in this situation.

It's all well and good to stay at home with the children when things are going well; however, when the family's facing a financial crisis -- and if Dad's worried to the point that he's on medication and it's affecting his health, this family IS in crisis -- it's time to make changes.

If she's in a situation where daycare would be excessively expensive and would negate her salary, she could consider taking in day care kids herself -- or perhaps just after-school kids. Around here people pay $50/week for afterschool care! She could just meet them at the bus, feed them a snack, monitor homework, and let them play a little. Or she could get a part-time evening and weekend job (while he's at home with the kids, which is a good thing for everyone).

Even if her salary's low, it'll be "found money" for this family, and it should only take a couple years to get rid of this debt. The key, of course, is to avoid spending more when their family's salary increases.

I agree with another poster who said that he is likely feeling worried about being the sole breadwinner for a family in debt. Today's business world is shakey, and LOTS of good workers with years of service to a company have found themselves out on the street for no fault of their own. He's looking at the debt, seeing that they're barely making it as is, and it's natural to worry about what would happen to his loved ones if his salary suddenly disappeared.

Another book I'd recommend is The Tightwas Gazette (get the Complete edition, which is the first three small volumes bound together in one big book). It's a great read on how to reduce your day-to-day costs to the very minimum; I like it because it illustrates how to calculate the actual cost of a purchase (i.e., how many hours of work are required to buy that new sweater, how much this car vs. that car will cost to keep, etc.). Much of it is very "severe", but it's a mindset, a way of monitoring one's spending. It won't, however, address investments, etc. The books that other people mentioned are better for that.

 

[disneysteve]

I'm guessing this is credit card debt - correct? If so, has he tried to get the interest rate lowered or transfer the balance to a 0% card? With an income of 130-150K, he should have no trouble getting a good card. That would help a lot in eliminating those steep interest charges and having payments actually be reducing debt.

I'm not clear on the source of the debt. Was it all from things related to moving into the house or are they continuing to charge new purchases?

As others have said, they need to really trim spending and live below their means and put all "extra" money toward debt repayment. My wife and I earn somewhere in that same ballpark and we save and invest 28% of our gross income. That would mean between 36K and 42K/year for them. They should be able to pay off that 45K within a couple of years if they really work at it.

So I voted NO to cashing in the 401K. I think that would be a huge mistake.

 

[imsayin]

They do drive modest cars- no SUV's, have a slighly above average home and really don't live all that lavish in general. I think they only take one vacation a year. I think when they moved into their house 5 years ago they bought a lot of furniture and upgrades for the house.

I think he makes 130,000 to 150,000 per year. I beleive that is somewhere around what he makes. Like I said they have older modest cars and I would guess there house to be around $250 or so.

If the above statements are true, no way should he touch his 401K. On a salary like that, there is obviously major mismanagement of money. They need to cut out unnecessary expense, which I am guessing there are a lot of. Do they go out to eat a lot, stop for coffee, buy lots of clothes, etc.? All that needs to be reduced until the debt is paid off. They can do it, they just need to buckle down.

If he makes $130,000 & takes home half of that, it comes out to $5400 a month take home. His mortgage should be around $1500 ($2000 max). Where is the rest of the money going???? That is what they need to look at (and my numbers are conservative, they probably take home more).

 

[canwegosoon]

I mean this in only a friendly way ...please stay out of it...we all make our own choices and decisions. I have seen a neighbor borrow against his IRA,(he came to me for advice- and I told him to do what was best for him after laying out 3 options-and I prayed that everything will work out ok)...but that's it(and actually he did borrow against his IRA and took the penalty-but he's not living on the street or bankrupt).

I have posted many times that over 100K for some people is not enough-due to demands of their jobs(I many cases it might prevent a spouse from working FT). People would be suprised with the hidded costs of upper management. Wishing your BIL & family all the best, and you too, I know it is hard to stand by and watch...but sometimes you have to. But you don't have to go bailing them out too...

Based on what you posted- could he refinance his home? But if he is taking meds, and confiding in family, I think he needs professional help- CPA, FP etc.

 

[missymouse]

If the above statements are true, no way should he touch his 401K. On a salary like that, there is obviously major mismanagement of money. They need to cut out unnecessary expense, which I am guessing there are a lot of. Do they go out to eat a lot, stop for coffee, buy lots of clothes, etc.? All that needs to be reduced until the debt is paid off. They can do it, they just need to buckle down.

If he makes $130,000 & takes home half of that, it comes out to $5400 a month take home. His mortgage should be around $1500 ($2000 max). Where is the rest of the money going???? That is what they need to look at (and my numbers are conservative, they probably take home more).

I agree with this post because we make less than your estimate of his earnings, live in a house we paid $350K for, have 3 kids, 2 cars, nice furniture and ZERO debt (except for our mortgage). It seems to me somewhere they must have charged a large amount and never paid it in full so they have just been paying the finance and interest and then continued to charge other things. We charge everything we possibly can would even charge our $1400 mortgage if we could but we have never not paid the full amount on any charge card. I think they should lock up the charge cards and give up a few luxuries (ie. Starbucks, eating out, movies, etc.) just until they get this under control. I knew some people that were in a very similar situation however I don't think they make more than 70K a year. They took out a home equity loan to pay off their debt and then 6 months later were in the exact same situation because they didn't change the behavior that got them into trouble in the first place.

 

[maxiesmom]

I knew some people that were in a very similar situation however I don't think they make more than 70K a year. They took out a home equity loan to pay off their debt and then 6 months later were in the exact same situation because they didn't change the behavior that got them into trouble in the first place.

Are you talking about my parents? How do I know you? The situation isn't funny, but it is helpful to know that they are not the only ones doing that.

I agree that there seems to be a huge problem with how your family handles money. But I have to say that I did take a loan out from my 401k to pay off credit card debt. I have been paying $30 a week back to it, and will be done in 3 months. I struggled with this choice, but it seemed better to pay myself the 4% interest than to pay 21% on the credit cards.