Retirement: How are you funding it?

[disneysteve]

Originally Posted by Staceyy

No, not totally cashing out. We prefer not to have a mortgage. Dh has about ten more years until retirement. The mortgage balance will be pretty small then, so it won't take much to pay it off. We also prefer not to have any car payments and we generally buy a car that is two years old.

Have you figured out how much you will lose in taxes and penalties for taking an early withdrawal from the 401k. There is no way it can be worth it to cash out your retirement plan to buy a car or pay off your mortgage. It will cost you thousands, if not tens of thousands, of dollars. Pull out $50,000, for example, and you'll pay a 10% penalty ($5,000) and probably 25% taxes ($12,500) for a total loss of $17,500. Plus you lose the future growth of that $50,000. At a 7% return, that 50K would more than double in 10 years to just over $100,000.

I'd stongly suggest reconsidering that plan.

[aida2003]

Originally Posted by Staceyy

No, not totally cashing out. We prefer not to have a mortgage. Dh has about ten more years until retirement. The mortgage balance will be pretty small then, so it won't take much to pay it off. We also prefer not to have any car payments and we generally buy a car that is two years old.

I greatly DISAGREE with this kind of thinking/decision. I think it's OK when you have too much savings and you'd like to draw down in order to pay-off your house (many would disagree about this step as well), but I would NEVER touch 401k for that purpose...maybe only if I'm older than 59.5.

[noppenbd]

The way I read it, Staceyy was saying that she would use part of the 401k to pay off the house and buy a used car AFTER her DH retires. In that case the argument isn't a clearcut. I agree that this shouldn't be done before retirement because of the penalties.

[disneysteve]

Originally Posted by noppenbd

The way I read it, Staceyy was saying that she would use part of the 401k to pay off the house and buy a used car AFTER her DH retires. In that case the argument isn't a clearcut. I agree that this shouldn't be done before retirement because of the penalties.

Staceyy, I'm sorry if I miss understood. If you meant that IN RETIREMENT you would be using money from the 401k to pay off the house and buy a car, that's totally different. I thought you meant you were cashing out now.