Should you use pension fund to pay off debt?
Dear Dave: Iím 61 years old and just lost my job with the only company for which Iíve ever worked. Iíve got $120,000 in my retirement fund, but I owe $57,000 on my home and $8,000 on a car. Should I pay off my debts using my retirement savings? — Peggy
Dear Peggy: Your idea makes me a little nervous if this is your only nest egg, because you wonít have much money left to live on. Youíll have taxes taken out and, depending on your tax bracket, that will probably leave you with about $50,000 if you pay everything off.
Now, if youíve got another source of income in the home providing $50,000 to $60,000 a year youíd probably be OK. And if thatís the case, Iíd say go for it. Write the checks and get the house and car off your back today!
Just be careful that you donít put yourself in a tight situation. Remember this, Peggy. Money is fun — if youíve got some. — Dave
Dear Dave: What happens to the money that is owed when someone files bankruptcy? Do creditors just have to write it off, or do other people pay the price through taxes or higher interest rates? — Grace
Dear Grace: In most cases the creditor just loses the money. Thatís one of the risks businesses face. Of course, any bankruptcy is also a seriously bad mark against the filerís credit record.
Chapter 13 filings may be considered a little less severe than Chapter 7 because youíre showing an interest in retiring the debts. They often allow you — if you have a regular income and limited debt — to keep some of the property you might otherwise lose. Also, some debt balances may be partially discharged, with the filer agreeing to make monthly payments to the trustee for distribution among remaining creditors.
A Chapter 7 bankruptcy is lots tougher on the one who files. It involves liquidating all assets that arenít exempt. Some of the filerís property may be sold by a court-appointed official — a trustee — or just turned over to creditors.
Itís really a lose-lose situation, Grace. The business loses money, and the filer suffers the emotional pain of participating in a shameful process. — Dave
Dear Dave: Should the 15 percent of my income that I invest toward retirement be done after taxes or before? Also, should I include my company match in that amount? — David
Dear David: I usually put 15 percent of my gross income into retirement before taxes, but you can do it either way. I donít count the company match. Keep in mind that with the 15 percent weíre talking about a rule of thumb here. The point is to be planning for and doing something about retirement. Start doing this before you put the kidsí college fund in place and pay off your home, but not until after youíve got a fully funded emergency fund and all other debts paid off except the house.
Way to be thinking ahead, David! — Dave