Dear Retirement Adviser, I'm a veteran teacher who did not save wisely. I only have about $50,000 in retirement savings. I'm 63 and would like to retire this June. If I do so, I'll draw Social Security benefits along with about $1,500 per month in pension benefits.
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I owe $30,000 on my home, and I owe about $50,000 on school loans for my master's degree. I also owe $19,000 on my car with a $490 monthly payment. And I have a credit card that charges 24% interest.
Here's my question: Should I use some of my retirement funds to pay off my car? I think that would free up some cash so that I can handle a lot of my other debts.
-- Jane Justify
Dear Jane, I suggest that all retirees, whenever possible, retain a measure of financial flexibility. Cashing in your retirement savings to pay off your auto loan will free up money in your monthly budget. But you lose the flexibility that those savings represent for other expenses you'll face in retirement.
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So the question becomes: Which measure of financial flexibility is more important to you?
Rebuilding those savings by investing the $490 per month can work. But you're going to have to take out more than $19,000 to have enough money to pay the income tax due on the distribution from a tax-deferred retirement account. You could also use that money to pay off your debts, but then you won't be able to rebuild your savings. Once again, you must decide which measure of financial flexibility is more important to you.
Your goal of retiring this year has kept me from suggesting that you postpone retirement and try to keep working up to your full retirement age. If that's a possibility, you should consider it. An early retirement adds an additional drain on your retirement income.
By taking Social Security at age 63, you'll be reducing your monthly benefit substantially compared with the benefit you'd see if you took it at your full retirement age of 66.
Here's how it breaks down: If you choose to receive benefits 36 months before you reach your full retirement age, your benefit will be 80% of your primary insurance amount. And those benefits are permanently reduced.
I'd rather see you tap into the $50,000 over the next three years for living expenses. It's hard to tell if that would work for you, but perhaps that would allow you to retire at 63 but not take Social Security until age 66.
It's interesting that you made such a big investment in professional development by getting a master's degree so late in your career. It's water under the bridge, but I'd like to see the math on whether it was in fact a smart investment, when the financial goal was to raise your monthly pension payment.
Finally, let's talk about your credit card. You obviously don't want to carry a balance on that card, given its whopping 24% interest rate. It's quite a bit over the national average of 13.33% for fixed-rate cards and 15.13% for variable-rate cards, as reported by Bankrate in a recent survey. If you have good credit, you should give the card issuer a call and ask about getting a lower rate.
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