Is this a stipud idea?

[Johjama]

Over the weekend my brother was telling me about his plans to cash in his 401K and pay off his house. He is 35 and has about 170k built up. His theory behind this is getting peace of mind about having a house paid off, and being able to have extra cash (from not making house payments, and interest).

My Dad and I were trying to explain the benifits of compounding interest but it didn't seem to have any traction with him. His response was that there is no guarantees in the future with stocks, investments etc. This way he has another 30 years to "rebuild" his 401k and the ability to save more cash every paycheck. Once he hits retirement age he will have a house paid off so he could sell it or rent it and once his kids move out (15-20 years down the road) him and his wife can downsize to whatever they can afford.

He is a truck driver and plans to work past 60, his wife also works and is building up a seperate retirement account.

Everything ive learned about saving, retirement and investing says this is a stupid idea and they should "stay the course". But after experiencing the last few years in the stock market I kind of agree, there are no guaranteesin life and it would be nice having a house paid off.

What do you guys think?

[bjl584]

I vote stupid idea.

By his logic of nothing being guaranteed in the future, how can he be sure he will work past 60 or even live that long?

Is your brother struggling to make house payments? Why not refinance or sell the house and buy something more affordable?

There are probably 10 things that your brother could do with relative ease to better his situation. None of them involve cashing out his 401K.

[Weird Tolkienish Figure]

Over the weekend my brother was telling me about his plans to cash in his 401K and pay off his house. He is 35 and has about 170k built up. His theory behind this is getting peace of mind about having a house paid off, and being able to have extra cash (from not making house payments, and interest).

My Dad and I were trying to explain the benifits of compounding interest but it didn't seem to have any traction with him. His response was that there is no guarantees in the future with stocks, investments etc. This way he has another 30 years to "rebuild" his 401k and the ability to save more cash every paycheck. Once he hits retirement age he will have a house paid off so he could sell it or rent it and once his kids move out (15-20 years down the road) him and his wife can downsize to whatever they can afford.

He is a truck driver and plans to work past 60, his wife also works and is building up a seperate retirement account.

Everything ive learned about saving, retirement and investing says this is a stupid idea and they should "stay the course". But after experiencing the last few years in the stock market I kind of agree, there are no guaranteesin life and it would be nice having a house paid off.

What do you guys think?

I would concur that it's a stupid idea, doesn't he realize the tax hit he'll take withdrawing this money? Yikes...

Does he realize that? He won't get his full balance, maybe 2/3rds of it depending on his tax bracket.

[MegStef]

It is never a good idea to cash out your 401k early. In addition to losing out on his retirement savings, he will need to pay state and federal taxes on the "income" he gets by cashing it in PLUS he will pay a penalty of 10%. He will probably only get to keep about 65 to 70% of the total he has in there now.

He is much better off waiting until he retires and is in a lower tax bracket when he receives the funds.

[rennigade]

I feel bad for your brothers kids. They will receive very little useful guidance from pops.

[Petunia 100]

Has your brother checked to see if his plan allows withdrawals from current employees? Typically, withdrawals are only allowed for "hardships", as defined by the plan.

[siggy_freud]

If it could be done without penalty or tax I'd say sure. I'd take a guaranteed return on investment by not paying interest on a house for the next 10-15 years over a chance for more money but with risk. However losing 20-35% of the money just by withdrawing is a guaranteed risk.

[Johjama]

Has your brother checked to see if his plan allows withdrawals from current employees? Typically, withdrawals are only allowed for "hardships", as defined by the plan.

I would bet that he hasnt checked. I think he needs to rethink this if he was serious about it. There are better was to get mortgage free than this. What if he can't work due to health reasons or something unaccounted for? He would be screwed.

[Petunia 100]

I would bet that he hasnt checked. I think he needs to rethink this if he was serious about it. There are better was to get mortgage free than this. What if he can't work due to health reasons or something unaccounted for? He would be screwed.

I think so, too. A better strategy would be to stop future contributions and start hitting his mortgage hard, while leaving the 170k already accumulated alone (invested sensibly, of course).

[disneysteve]

Ask him this. Would he take out a mortgage at 35-40% interest to buy a home? That is essentially what he is proposing because he will lose 35-40% in taxes and penalties when he cashes out his 401k. And that doesn't count the loss of growth of that money over the next 30 years making the true cost far higher.

STUPID IDEA!

[snafu]

Your brother is making a gigantic mistake even considering cashing out retirement money he will need sometime in the future. Yes, over 30 years the market will gyrate but he merely needs to continue to contribute to a low fee Index Fund. Retirement funds count on long timelines to grow to sums to support you as a senior.

If paying off the mortgage is his first priority we can all offer suggestions to free up money to dedicate to the principal.