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Learn why it’s not urgent to pay off your mortgage and why a 401(k) is more important.
Listener question day. Should I Withdraw From My 401(K) to Pay Off Mortgage?
Before we get started, I wanted to let you know about another awesome podcast called Profit Boss Radio. Profit Boss Radio, hosted by MBA and Certified Financial Planner Hilary Hendershott, highlights inspiring women who have created success in their financial and professional life. Each week you can tune in and hear how women have paved the road to sustained success with both beliefs and actions. Check it out at www.profitbossradio.com.
A listener writes:
Linda,
I’m 45 years old and gross about $100,000/yr. I have $390,000 in my 401(k), and owe about $175,000 on my mortgage, with 17 years left at 2.75%. I have about $100,000 in savings. I fear I may get laid off later this year. Should I withdraw money from my 401(k) to pay off my mortgage?
Love your show.
Thank you,
Phil
There’s 3 things to address here: 1) preparing to lose your job, 2) paying off your home early, and 3) why a 401(k) is important.
1). Preparing to lose your job.
That’s a hard fate to face and causes a lot of fear.
There are things you can do to lessen the strain and it doesn’t not involve dipping into your 401(K).
Listen to my prior podcast about how to prepare to lose your job.
2) Paying off your home is overrated because all you need to do is make your annual payments, not pay off a lump sum 17 years early.
While $100k won’t last forever, it will give you ample time to find another job and cover your mortgage payments.
Take this time to save more money, sell un-needed stuff and reduce your expenses. For example, use miles and points for your vacation instead of paying outright for one.
You have a great interest rate, so no need to refinance.
You can pay 1/12th extra per month and pay down your interest and increase your equity faster. ($200/mo. extra on $2400).
House debt is the best debt to have because it’s the cheapest, so
look into a HELOC while you’re still employed.
3) If you dip into your 401(k), you’ll have a 10% penalty for being under age 59 1/2 plus tax on untaxed income.
Only under extreme circumstances as a very last resort should you touch this money.
Need it to grow for retirement, separately from your home.
Use it to offset your income while you are employed, might get you into a lower tax bracket (we’ll see how the new tax plan is).
In addition to saving in and outside your 401(k), look for business opportunities on the side or even part-time work while you’re looking for a job (Uber driver?).
Stay positive, you may end up better off!
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