Author Topic: Should I cash out my 401k?  (Read 16103 times)

SJ

  • Bristles
  • **
  • Posts: 67
Should I cash out my 401k?
« on: September 16, 2012, 08:54:46 AM »
So I'll make this quick and dirty:

Was laid off last year from a good, awesome paying job of 10 years
Left with a severance (gone) and unemployment
Was unemployed for a while, but now care for a disabled adult out of my home
Current debt:
$6k CC debt @ 9.9% (second property purchase...still own it)
$4k student loan (6.5%)
$4,800 CC debt @ 19% (currently on deferred interest until Nov.)
$2,400 car loan @ 7%
$252k mortgage @ 3.75%
Current savings of about $3k
$21k in fully vested 401k from previous employer
Wife makes about $36k/year and I make about $32k/year (non-taxable)...I just recently took a 30% paycut (oh the joys of being in a state-funded field)


Due to the recent paycut I took, we need to find a way to either make more money, or cut our monthly expenses.  Due to many factors, making more money while being able to keep my current employment would be difficult, and with the benefits of working from home and having a non-taxable income, it would mean having to find a replacement job making at least $45-50k just to be on par with my current situation. 

So my thought was to take out my 401k and use the remainder (after taxes and penalty) to pay off all but the student loan and mortgage debt.  We should be able to recoup some of the taxes paid on the distribution as my income is non-taxable, and we have a bunch of business writeoff's this year (in addition to mortgage interest) which means we'll likely have a less than zero tax liability this year when all is said and done. 

I hope that's enough to go off.  Thoughts?  Advice?  Face punches?
« Last Edit: September 17, 2012, 10:02:24 AM by SJ »
"We are all in the gutter. But some of us are looking up at the stars."
   ~ Oscar Wilde

TheDude

  • Magnum
  • ****
  • Posts: 365
Re: Should I cash out my 401k?
« Reply #1 on: September 16, 2012, 09:51:05 AM »
I would say no. It looks like you are making pretty close to 68K after taxes. You need to cut down on lifestyle and pay of the debt. Cashing out the 401k is the lazy way out.

SJ

  • Bristles
  • **
  • Posts: 67
Re: Should I cash out my 401k?
« Reply #2 on: September 16, 2012, 10:32:40 AM »
I would say no. It looks like you are making pretty close to 68K after taxes. You need to cut down on lifestyle and pay of the debt. Cashing out the 401k is the lazy way out.

Well, her income is taxable, so not quite $68k after taxes (though this year might be an exception with all of the write-off's we have).  The thing is, doing this would free up $500/month which we could really use right now after that pay cut.  We live a pretty Mustachian lifestyle already, so there isn't much more we can cut in monthly expenditures to free up a little more breathing room.  Currently, we have about $500/month that isn't already spoken for, so one or two unexpected expenses could put us in a bad place, which is why we need to either make more money or pay off debt to free up a bit more breathing/savings room.  Plus, this would drastically cut down on high interest debt, which seems a good thing to me.
"We are all in the gutter. But some of us are looking up at the stars."
   ~ Oscar Wilde

arebelspy

  • Global Moderator
  • Senior Mustachian
  • *****
  • Posts: 10000
  • Age: -999
  • Location: Las Vegas
Re: Should I cash out my 401k?
« Reply #3 on: September 16, 2012, 10:54:47 AM »
I would say no. It looks like you are making pretty close to 68K after taxes. You need to cut down on lifestyle and pay of the debt. Cashing out the 401k is the lazy way out.

+1.  Treat the debt as an emergency, and deal with it, but paying extra penalties and taxes to do so in order to not feel a little more pain when you're fighting that debt is not the way to do it, IMO.

YMMV.
A silent voice is as powerless as a silenced one.

-------------------------------------------------------

  The Cheat is a millionaire!

SJ

  • Bristles
  • **
  • Posts: 67
Re: Should I cash out my 401k?
« Reply #4 on: September 16, 2012, 10:59:22 AM »
I appreciate the replies! 

I feel like I haven't adequately explained the situation.  The main goal here is to #1: free up monthly cash so we can save AND earn us some breathing room for emergencies/unexpected expenses and #2: pay off debt!

Let me illustrate a little more...

So in my job, I get paid by the day at a daily rate.  So if my client is with me that day, I get paid, if they aren't, I don't.  So if they decide to visit family on Mars for a week I'm suddenly without $700 or so.  As I said above we have combined about $500 in cash that isn't spoken for already every month, so if I'm out $700 one month that leaves me $200 short on bill money (and heaven forbid if that same month the tranny goes out on the old Mustachian cars we own...or the water heater...or...or...).  Having an extra $500/month of breathing room could literally make the difference in paying my mortgage or not.  That's just a simple example.


That $500/month we currently have isn't totally gravy either, so I can't just sock it away and use that to cover shortfalls.  Why?  Well, at least twice a year I have a rather large airline expense ($1k or so) to cover so that I can fly my kids from out of state for their visits with us.  And then there are other expenses, like dental and medical expenses I might incur as I also have no healthcare coverage with this job (I'm an independent contractor, so I have no benefits, no sick pay, no vacation days, nada).  I also drive quite a bit for this job for doctors appointments and the like, which means one month I might spend $100 more than the previous in gas.  So really, maybe half of that is gravy that can be saved, the other half might be saved or might have to be spent depending on the scenario in a given month.

Does that make the situation any easier to gauge?  If not, I'll get into nitty-gritty.
« Last Edit: September 16, 2012, 11:04:03 AM by SJ »
"We are all in the gutter. But some of us are looking up at the stars."
   ~ Oscar Wilde

arebelspy

  • Global Moderator
  • Senior Mustachian
  • *****
  • Posts: 10000
  • Age: -999
  • Location: Las Vegas
Re: Should I cash out my 401k?
« Reply #5 on: September 16, 2012, 11:09:37 AM »
All of that (erratic income, certain required expenses, etc.) is largely irrelevant, IMO, to the cash out 401k question.

The relevant question is: can you pay off that debt without cashing out the 401k?

My guess is yes (though it may be painful.. Perhaps very painful). That means you should do it that way.

If the answer to that question is no (and you aren't fooling yourself to take the easier, non-painful way*), then you already have the answer to the question posed in the title of this thread, and that's (literally) the only way to go.


*It will still be painful.  It's just that your future self, not your current self, will feel the pain.
A silent voice is as powerless as a silenced one.

-------------------------------------------------------

  The Cheat is a millionaire!

ch12

  • Senior Mustachian
  • *****
  • Posts: 517
Re: Should I cash out my 401k?
« Reply #6 on: September 16, 2012, 11:16:49 AM »
If you posted your fixed and variable expenses, I am fairly sure that the Mustachians would point out where you could cut money. You said that you'd be pretty close to zero tax liability this year, so I'm going to think that the 68k that you said your household makes is the number that we should be drawing from.

MMM makes do on 28k a year plus a paid off house. It is essential that we take into account your mortgage and existing high debt. But even with debt repayment, you should not be spending close to 68k. Additionally, I don't understand why you have a 2x per year expense of 1k for flying your children in from out of state. If you have such a huge debt load (which includes CC debt at 19% interest), do you think that the money could be better directed?

SJ

  • Bristles
  • **
  • Posts: 67
Re: Should I cash out my 401k?
« Reply #7 on: September 16, 2012, 11:23:15 AM »
Additionally, I don't understand why you have a 2x per year expense of 1k for flying your children in from out of state. If you have such a huge debt load (which includes CC debt at 19% interest), do you think that the money could be better directed?

I'm not sure what you're asking here.  My kids live out of state, if I want to see them I'm required to pay for their airline tickets to get here to see us (at least 2 of the visits).  Make sense?
"We are all in the gutter. But some of us are looking up at the stars."
   ~ Oscar Wilde

ch12

  • Senior Mustachian
  • *****
  • Posts: 517
Re: Should I cash out my 401k?
« Reply #8 on: September 16, 2012, 11:28:33 AM »
I think that I'm confused about you being required to pay for their plane tickets.

SJ

  • Bristles
  • **
  • Posts: 67
Re: Should I cash out my 401k?
« Reply #9 on: September 16, 2012, 11:30:26 AM »
I think that I'm confused about you being required to pay for their plane tickets.

Well, if I want to see them, then I'm the one who has to pay for it.  They're kids, they don't have jobs.  And the divorce agreements specify who's responsible for this expense.  Make more sense now?
"We are all in the gutter. But some of us are looking up at the stars."
   ~ Oscar Wilde

ch12

  • Senior Mustachian
  • *****
  • Posts: 517
Re: Should I cash out my 401k?
« Reply #10 on: September 16, 2012, 11:33:19 AM »
My mistake! I thought that your out-of-state children were grown up and living on their own. I didn't understand why they couldn't pay for their own tickets out of their own wages. Apologies.

EDIT: The reason why I thought that was that my father and I live in different states. I'm in Indiana at college and he's retired in Florida. I've paid for my own plane tickets with my own wages. I'm a pretty spoiled, entitled child [though rjack's post about giving $100k to each of his sons made me feel a lot better], so I didn't understand how other kids wouldn't want to see their dads badly enough that they'd be willing to spend the money to see him. Obviously, I got the completely wrong end of the stick.
« Last Edit: September 16, 2012, 08:40:02 PM by ch12 »

SJ

  • Bristles
  • **
  • Posts: 67
Re: Should I cash out my 401k?
« Reply #11 on: September 16, 2012, 11:34:17 AM »
My mistake! I thought that your out-of-state children were grown up and living on their own. I didn't understand why they couldn't pay for their own tickets out of their own wages. Apologies.

Lol...no worries.  I wasn't specific and didn't immediately see that created your confusion.  :)
"We are all in the gutter. But some of us are looking up at the stars."
   ~ Oscar Wilde

arebelspy

  • Global Moderator
  • Senior Mustachian
  • *****
  • Posts: 10000
  • Age: -999
  • Location: Las Vegas
Re: Should I cash out my 401k?
« Reply #12 on: September 16, 2012, 01:46:32 PM »
They're kids, they don't have jobs.

There's your problem.  See if you can get them jobs running a lemonade stand, or at least building iPhones for Apple.

Kids under 10 these days have no work ethic.  I blame child labor laws.



;)
A silent voice is as powerless as a silenced one.

-------------------------------------------------------

  The Cheat is a millionaire!

TheDude

  • Magnum
  • ****
  • Posts: 365
Re: Should I cash out my 401k?
« Reply #13 on: September 16, 2012, 02:58:19 PM »
I still think no. Arebelspy is right its going to be painful. Yes its going to suck but you need to suck it up and take care of business. My wife and I and our one kid in day care dont go through 68K a year. Since you are so worried about cash flow I think you start with smallest loan and work on paying it off first. How about a job delivering pizzas or something.

Dont get discouraged you can do this. You don't need to cash in your 401k.

SJ

  • Bristles
  • **
  • Posts: 67
Re: Should I cash out my 401k?
« Reply #14 on: September 16, 2012, 03:15:02 PM »
I still think no. Arebelspy is right its going to be painful. Yes its going to suck but you need to suck it up and take care of business. My wife and I and our one kid in day care dont go through 68K a year. Since you are so worried about cash flow I think you start with smallest loan and work on paying it off first. How about a job delivering pizzas or something.

Dont get discouraged you can do this. You don't need to cash in your 401k.

Well, I live in a rural area...you can't even get a pizza delivered to your house out here if you wanted to.  And most jobs would not work in addition to the one I have; I am "on call" and have to be available at the drop of a hat, and that's presuming my client is away since he can't be left alone for long periods of time.  So yeah, it's either this job, or another basically, not both.

So far I'm still leaning towards cashing it out.  I haven't seen any solid reasons why I shouldn't really.  Seems to me that paying off high interest debt to open up cash flow, which we sorely need, AND getting rid of the debt now vs. taking 5+ years to pay it off is a good trade-off.
"We are all in the gutter. But some of us are looking up at the stars."
   ~ Oscar Wilde

arebelspy

  • Global Moderator
  • Senior Mustachian
  • *****
  • Posts: 10000
  • Age: -999
  • Location: Las Vegas
Re: Should I cash out my 401k?
« Reply #15 on: September 16, 2012, 03:17:28 PM »
And so you want .. what?  Our blessing?

If you want to pay the taxes and a 10% (ouch) penalty instead of buckling down, cutting costs, and paying it off organically... knock yourself out.
A silent voice is as powerless as a silenced one.

-------------------------------------------------------

  The Cheat is a millionaire!

SJ

  • Bristles
  • **
  • Posts: 67
Re: Should I cash out my 401k?
« Reply #16 on: September 16, 2012, 03:35:24 PM »
And so you want .. what?  Our blessing?

If you want to pay the taxes and a 10% (ouch) penalty instead of buckling down, cutting costs, and paying it off organically... knock yourself out.

Nope, I didn't come calling for a blessing.  I was looking for some insight that wasn't mine.  I think my situation is being looked at as simply paying down debt, as stachian's are wont to do, but there's another more important issue at play.  I need to find some way, fast, to make an additional $500 a month after taxes to keep homelessness and financial disaster at bay, and it seems the best way to do that (while ALSO killing some silly debt) is to cash this thing out and take the 10% hit.   

I hate to be a doom and gloom kind of guy, but I honestly don't think our financial systems and way of life are going to still be sound in 30 years when my 401k will matter....we'll either evolve it, or watch it crash and burn...it's a house of cards bound for collapse.

I'd love to be shown how crazy I am in my thinking here.  I can handle a few punches to the face.
"We are all in the gutter. But some of us are looking up at the stars."
   ~ Oscar Wilde

AJ

  • Senior Mustachian
  • *****
  • Posts: 728
  • Age: 31
  • Location: Oregon
Re: Should I cash out my 401k?
« Reply #17 on: September 16, 2012, 03:41:56 PM »
I think we need more information here. You are saying that you need an additional $6000 a year or you'll be homeless, but then you also say that you make $68k, will have a less than zero tax liability this year, and live as bare bone as possible. Something isn't adding up. You make more net than the average US household does gross, and many here live on half or a third of what you take home. I don't think you're going to get very helpful advice until you post your monthly expenses.

I was looking for some insight that wasn't mine.  I think my situation is being looked at as simply paying down debt...

And it will continue to be looked at that way until you provide some more information. All you've given us is income and debt. Most people with your income and debt levels could/should pay it down organically and not cash out a 401k.

SJ

  • Bristles
  • **
  • Posts: 67
Re: Should I cash out my 401k?
« Reply #18 on: September 16, 2012, 03:50:39 PM »
I think we need more information here. You are saying that you need an additional $6000 a year or you'll be homeless, but then you also say that you make $68k, will have a less than zero tax liability this year, and live as bare bone as possible. Something isn't adding up. You make more net than the average US household does gross, and many here live on half or a third of what you take home. I don't think you're going to get very helpful advice until you post your monthly expenses.

I was looking for some insight that wasn't mine.  I think my situation is being looked at as simply paying down debt...

And it will continue to be looked at that way until you provide some more information. All you've given us is income and debt. Most people with your income and debt levels could/should pay it down organically and not cash out a 401k.

You're absolutely right, I should have posted a much more thorough balance sheet before asking for advice.  So, I apologize for not being more thorough.  I'll see if I can't put something together more detailed and then come back for more advice.  Thanks to everyone who responded!
"We are all in the gutter. But some of us are looking up at the stars."
   ~ Oscar Wilde

arebelspy

  • Global Moderator
  • Senior Mustachian
  • *****
  • Posts: 10000
  • Age: -999
  • Location: Las Vegas
Re: Should I cash out my 401k?
« Reply #19 on: September 16, 2012, 04:53:20 PM »
And so you want .. what?  Our blessing?

If you want to pay the taxes and a 10% (ouch) penalty instead of buckling down, cutting costs, and paying it off organically... knock yourself out.

Nope, I didn't come calling for a blessing.  I was looking for some insight that wasn't mine.  I think my situation is being looked at as simply paying down debt, as stachian's are wont to do, but there's another more important issue at play.  I need to find some way, fast, to make an additional $500 a month after taxes to keep homelessness and financial disaster at bay, and it seems the best way to do that (while ALSO killing some silly debt) is to cash this thing out and take the 10% hit.   

I hate to be a doom and gloom kind of guy, but I honestly don't think our financial systems and way of life are going to still be sound in 30 years when my 401k will matter....we'll either evolve it, or watch it crash and burn...it's a house of cards bound for collapse.

I'd love to be shown how crazy I am in my thinking here.  I can handle a few punches to the face.

Okay, I think I understand a little better.

I agree with AJ about needing more info.

With 68k, even with some non-negotiable expenses (such as those plane tickets), I think you could pay down/off those debts.

You may even want to snowball it, which normally I'm very against for a Mustachian, since it's mathematically inferior, but it may help in your case due to freeing up cash flow quicker.  Then you can send the extra payments from the paid off debt to the next debt if you have the cash flow (I.e. met with more clients and made more money that month) and use it to make your mortgage payments on the months you can't.

A silent voice is as powerless as a silenced one.

-------------------------------------------------------

  The Cheat is a millionaire!

JohnGalt

  • Magnum
  • ****
  • Posts: 416
  • Age: 29
  • Location: Dallas/Ft Worth Area
Re: Should I cash out my 401k?
« Reply #20 on: September 16, 2012, 10:00:05 PM »
You live in a rural area and have a $250k mortgage?  Do you have any equity here to sell and move into something you can afford?  Because, let's face it, what you're telling us is that you can't afford your lifestyle. 
You're living in a rural area that keeps you from being able to find a second job but you're not benefiting from the low costs that usually come with rural areas to offset the lower income.

You have cash flow and debt problems and still own a second property?  Sell it.  Now.

If you're worried about having a buffer to cover the unexpected drops in income or increases in expense - turn the $3k savings into $10k before paying off debt - or just keep saving money until you have enough to pay off enough debts to net the $500/mo in cash flow your looking for.  There is absolutely no reason to raid the 401k until you are actually on the verge of being homeless.

All that said - I'm guessing like the other posters that the problem here isn't $500/mo in cash flow.  It's that you have not adjusted your lifestyle and spending to appropriately reflect both your lower income and financial goal of becoming debt free. 

I hate to be a doom and gloom kind of guy, but I honestly don't think our financial systems and way of life are going to still be sound in 30 years when my 401k will matter....we'll either evolve it, or watch it crash and burn...it's a house of cards bound for collapse.

I'd love to be shown how crazy I am in my thinking here.  I can handle a few punches to the face.

Every doom and gloom guy seems to start off by saying that they "hate to be that guy" or that they're "usually an optimist".  If you don't think our financial system and way of life will exist in 30 years, what do you think will exist?  Once you have paid off the debt, where will you put your savings then?  If you don't plan on ever investing again and really do think the money in the 401k will be useless when you need it, then by all means withdraw it now and do something with it while its still valuable.  But, if that's what you believe, why are you asking for our advice?  We're not much of a doom and gloom community.  In fact, most of us are planning our financial future around the financial system that you don't think will exist in 30 years.  Any financial advice we give to you will be heavily influenced by that.

SJ

  • Bristles
  • **
  • Posts: 67
Re: Should I cash out my 401k?
« Reply #21 on: September 17, 2012, 05:10:36 AM »
You live in a rural area and have a $250k mortgage?  Do you have any equity here to sell and move into something you can afford?  Because, let's face it, what you're telling us is that you can't afford your lifestyle. 
You're living in a rural area that keeps you from being able to find a second job but you're not benefiting from the low costs that usually come with rural areas to offset the lower income.

Yep, in this case rural doesn't mean "trailer park".  Ours is actually the cheapest home in the area, most are $350k+ with a few in a 5 mile radius that hit close to $20 million.  We won't be moving though, we love where we live and moving wouldn't save us any mortgage expense unless we moved to a very unpleasant area to live in where the homes are less than $100k; not worth it for the few hundred dollars/month it might save us.  Plus, we have livestock animals that need the acreage and barn we have.  The place we were renting prior to buying this house was only about $150 less per month than our current mortgage is, so our home really isn't the problem.

But it's not so much the rural area that keeps me from getting a second job, it's my first job that keeps me from getting a second.  I'm on call, can't be away for more than a few hours, it takes priority and any other job would have to play third fiddle which I'm sure wouldn't be acceptable for most employers, etc.

You have cash flow and debt problems and still own a second property?  Sell it.  Now.

Yep, purchased when I was making excellent money and didn't see the layoff's coming.  We're not opposed to selling it, but it's not exactly an easy sell as it's not oceanfront property, or in an easy location; might take years to sell.

All that said - I'm guessing like the other posters that the problem here isn't $500/mo in cash flow.  It's that you have not adjusted your lifestyle and spending to appropriately reflect both your lower income and financial goal of becoming debt free.

You're correct to a degree.  I'm sure we could get mega-stachian and reduce our monthly expenses another $100-200, but that would be ultra painful and not create the buffer we'd need anyhow.

I hate to be a doom and gloom kind of guy, but I honestly don't think our financial systems and way of life are going to still be sound in 30 years when my 401k will matter....we'll either evolve it, or watch it crash and burn...it's a house of cards bound for collapse.

I'd love to be shown how crazy I am in my thinking here.  I can handle a few punches to the face.

Every doom and gloom guy seems to start off by saying that they "hate to be that guy" or that they're "usually an optimist".  If you don't think our financial system and way of life will exist in 30 years, what do you think will exist?  Once you have paid off the debt, where will you put your savings then?  If you don't plan on ever investing again and really do think the money in the 401k will be useless when you need it, then by all means withdraw it now and do something with it while its still valuable.  But, if that's what you believe, why are you asking for our advice?  We're not much of a doom and gloom community.  In fact, most of us are planning our financial future around the financial system that you don't think will exist in 30 years.  Any financial advice we give to you will be heavily influenced by that.

You're right...in the end I think this money is far more valuable to me today than it will be in 30 years, so I guess I didn't really need any advice after all.  Thanks everyone for lending me your insight!
"We are all in the gutter. But some of us are looking up at the stars."
   ~ Oscar Wilde

DocCyane

  • Magnum
  • ****
  • Posts: 336
  • Age: 45
  • Location: California
  • Keep going. You're doing just fine.
Re: Should I cash out my 401k?
« Reply #22 on: September 17, 2012, 06:54:04 AM »
That was an interesting conversation. In the end, he just wanted access to that money. Sometimes a 'stash is just too tempting. And we never did get that monthly breakdown of expenses.
Everything will be okay in the end. If it's not okay, it's not the end.

SJ

  • Bristles
  • **
  • Posts: 67
Re: Should I cash out my 401k?
« Reply #23 on: September 17, 2012, 09:03:53 AM »
And we never did get that monthly breakdown of expenses.

I said I'd put one together...geez, give me time...

Income after taxes/insurance/401k contribution, etc.:

Me:     $2,800
Wife:  $2,300

TOTAL:  $5,100


Expenses:

Mortgage:  $1,450
Visa #1:  $50
Auto Insurance:  $111
Child Support:  $550
Cell phones:  $130 (after workplace reimbursement)
Vehicle loan:  $255.48
Visa #2 (property):  $225
Utilities:  $165*
Internet:  $70
Student Loans:  $60
Charity:  $60*
Internet Radio:  $10
Internet backup:  $10
Netflix:  $18
Gas:  $292*
Groceries:  $600*
Fast Food/Restaurants:  $88*
Pharmacy:  $200*
Doctor:  $100
Kids visits: $150 (costs average over 1 year)
Livestock business $150 (costs averaged over 1 year...not paying for itself, yet)

TOTAL:  $4,764
* averaged over 3-6 months

« Last Edit: September 17, 2012, 10:00:45 AM by SJ »
"We are all in the gutter. But some of us are looking up at the stars."
   ~ Oscar Wilde

arebelspy

  • Global Moderator
  • Senior Mustachian
  • *****
  • Posts: 10000
  • Age: -999
  • Location: Las Vegas
Re: Should I cash out my 401k?
« Reply #24 on: September 17, 2012, 10:23:02 AM »
Wow.  I imagine you'll see some posts on your cell phone, home Internet/internet radio/internet backup, groceries, gas, etc.

I think trimming $500/mo is feasible without much pain at all.
A silent voice is as powerless as a silenced one.

-------------------------------------------------------

  The Cheat is a millionaire!

AJ

  • Senior Mustachian
  • *****
  • Posts: 728
  • Age: 31
  • Location: Oregon
Re: Should I cash out my 401k?
« Reply #25 on: September 17, 2012, 10:27:29 AM »
First, I know what you *want* to hear. You want to hear that the right thing is to cash out your 401k. That would be the easiest thing to do that would make you feel like you were making progress without really having to make any big changes. But really and truly, from all the information you've presented, your situation just doesn't warrant that. You can do whatever you like with your own money, of course. But you came asking for advice from this well-informed and straight-talking community. This is not the place to come for yes-men.

I know my advice is going to fall on deaf ears, but you can't afford the house you are living in. Yes, technically a bank would approve the loan, but that really doesn't say much. Two-times your annual income is a nice safe measure for how much house you can afford (its the measure our grandparents used), and many people would even go up to 3x annual income. Yours is even higher than that. I don't understand why you think you need to move to a sub-$100k house to save any money. There is a lot of room between $250k and $100k to find a decent but more affordable place to live.

$165 for utilities (not including phone or internet) seems high, so I'm assuming the place you live is large and expensive to heat/cool. $300 a month for gas could be reduced if you lived in a less rural area. The $150 for your livestock would also be eliminated. Yeah, the place won't be as nice. Boo hoo, waah waah. That is kind of the *point*, right? You haven't adjusted your lifestyle expectations down to your new income. It is time to get real and open your eyes to the fact that you can't afford to live the way you did before. Bonus points if you can actually *embrace* the idea of lifestyle deflation.

Cell bill, entertainment, and groceries all seem high given your "desperate" situation. Also, why are you still contributing to the 401k?

There are definitely times when people should cash in their 401ks. But those times are characterized by a desperation that includes canceling Netflix and internet radio, moving into cheaper housing, and eating nothing but rice and beans. Since you are not yet that desperate, you are not at the place where you need to cash in the 401k.

kkbmustang

  • Global Moderator
  • Senior Mustachian
  • *****
  • Posts: 1145
Re: Should I cash out my 401k?
« Reply #26 on: September 17, 2012, 10:33:40 AM »
SJ-

I'm just at the beginning of my Mustachian journey, but in our first month of "Mustachian trimming" we took our grocery bill for 2 adults, a 9 year and a 7 year old from $800/mo to on pace to be $400/mo. We are spending between $75-100 per week and eating very well. We also, except for so far a $15 slip, haven't spent money on eating out.  If it's just you and your wife, you can cut your grocery budget to $200/month and not eat out. That's $488 right there.

AJ

  • Senior Mustachian
  • *****
  • Posts: 728
  • Age: 31
  • Location: Oregon
Re: Should I cash out my 401k?
« Reply #27 on: September 17, 2012, 10:35:35 AM »
I think trimming $500/mo is feasible without much pain at all.

Oh, are we just trying to trim off $500? That's even easier:
  • $130 - Cancel cell phones and use workplace reimbursement to get pre-paids and Google Voice
  • $38 - Cancel Netflix (get entertainment free from library and Hulu), internet radio, and internet backup
  • $200 - Reduce grocery bill by a third.
  • $150 - sell livestock until you can afford the business

That gives you more than $500 extra, and we haven't even discussed selling the car to get rid of the loan and comprehensive insurance, the charity, or the dining out.


SJ

  • Bristles
  • **
  • Posts: 67
Re: Should I cash out my 401k?
« Reply #28 on: September 17, 2012, 10:42:23 AM »
First, I know what you *want* to hear. You want to hear that the right thing is to cash out your 401k. That would be the easiest thing to do that would make you feel like you were making progress without really having to make any big changes. But really and truly, from all the information you've presented, your situation just doesn't warrant that. You can do whatever you like with your own money, of course. But you came asking for advice from this well-informed and straight-talking community. This is not the place to come for yes-men.

Not looking for yes-men...I know what I came for...

I know my advice is going to fall on deaf ears, but you can't afford the house you are living in. Yes, technically a bank would approve the loan, but that really doesn't say much. Two-times your annual income is a nice safe measure for how much house you can afford (its the measure our grandparents used), and many people would even go up to 3x annual income. Yours is even higher than that. I don't understand why you think you need to move to a sub-$100k house to save any money. There is a lot of room between $250k and $100k to find a decent but more affordable place to live.

We bought this house when we made more money, but we've been in it less than a year, so there's no real equity to speak of.  Also, we need the acreage and the barn for our livestock, hard to find that for much less than what we paid unless we move into a VERY rural place, which is just too far out from where we need to be for commuting and other reasons.

$165 for utilities (not including phone or internet) seems high, so I'm assuming the place you live is large and expensive to heat/cool. $300 a month for gas could be reduced if you lived in a less rural area. The $150 for your livestock would also be eliminated. Yeah, the place won't be as nice. Boo hoo, waah waah. That is kind of the *point*, right? You haven't adjusted your lifestyle expectations down to your new income. It is time to get real and open your eyes to the fact that you can't afford to live the way you did before. Bonus points if you can actually *embrace* the idea of lifestyle deflation.

Well, we don't cool the house as we have no AC, so this is heating/electric/trash (no water, we're on a well).  It's not a large place either, a total of 2,000 sq. ft.  Livestock is a business, so that won't be eliminated as it'll provide for itself and then some in the coming years.

Cell bill, entertainment, and groceries all seem high given your "desperate" situation. Also, why are you still contributing to the 401k?

Cell could certainly come down some, but we both must have cells (we have no home phone, need it for work in both cases).  Groceries could come down some, but since I'm responsible for feeding my client, who I can't force onto any kind of poor man's diet, it likely couldn't go down by much.  401k is my wife's.


One thing I wonder is why so many wouldn't cash in this very tiny 401k to pay off high interest debt?  If I paid that debt over the course of the next 3 years, I'd end up paying as much in interest (or more) than the 10% penalty for taking the distro (taxes aren't really relevant since I'm in a better tax position now than I might ever be since my income is non-taxable and we have many business writeoff's thanks to being an independent contractor and having livestock).
« Last Edit: September 17, 2012, 10:47:44 AM by SJ »
"We are all in the gutter. But some of us are looking up at the stars."
   ~ Oscar Wilde

WaxOnWaxOff

  • Stubble
  • *
  • Posts: 29
Re: Should I cash out my 401k?
« Reply #29 on: September 17, 2012, 10:46:15 AM »
I would say no. It looks like you are making pretty close to 68K after taxes. You need to cut down on lifestyle and pay of the debt. Cashing out the 401k is the lazy way out.

+1.  Treat the debt as an emergency, and deal with it, but paying extra penalties and taxes to do so in order to not feel a little more pain when you're fighting that debt is not the way to do it, IMO.

YMMV.

I agree with the other Mustachians advising you NOT to cash out your 401k. You don't learn any new habits by doing so, and there's nothing to stop you from accumulating new debt.

TheDude

  • Magnum
  • ****
  • Posts: 365
Re: Should I cash out my 401k?
« Reply #30 on: September 17, 2012, 10:50:23 AM »
What do you have for livestock? Is the livestock itself worth anything? I think getting rid of the livestock until you can afford to raise livestock is a good idea. What if you sold your livestock and applied that money towards cc debit. Make the deal with your self that once all the debt is gone and you can pay cash for more livestock.

I think your budget number only convinced us more that you can pay the debts without cashing out your 401k. There is a lot of fat there you can trim. Sure it maybe a little uncomfortable at times but I think you can get there without much pain. And for the record I don't necessarily think the house is too expensive. Its on the expensive side but its doable if you get the rest of your budget under control.

kkbmustang

  • Global Moderator
  • Senior Mustachian
  • *****
  • Posts: 1145
Re: Should I cash out my 401k?
« Reply #31 on: September 17, 2012, 10:51:29 AM »

[/quote]

Groceries could come down some, but since I'm responsible for feeding my client, who I can't force onto any kind of poor man's diet, it likely couldn't go down by much. 
[/quote]

Your grocery budget can come down a lot, even feeding your client, and it wouldn't be a poor man's diet. I'm happy to provide you with recipes for cooking healthy, good meals without spending a shit ton of money.

kkbmustang

  • Global Moderator
  • Senior Mustachian
  • *****
  • Posts: 1145
Re: Should I cash out my 401k?
« Reply #32 on: September 17, 2012, 10:52:21 AM »
Obviously haven't figured out the quoting thing...

AJ

  • Senior Mustachian
  • *****
  • Posts: 728
  • Age: 31
  • Location: Oregon
Re: Should I cash out my 401k?
« Reply #33 on: September 17, 2012, 11:02:13 AM »
One thing I wonder is why so many wouldn't cash in this very tiny 401k to pay off high interest debt?

Cashing out your 401k is the financial equivalent of getting a lap band. For some people in very dire situations, it is a good option (or, at least, a less crappy option). But for most people in most situations it is just an easy way out. Where surgery may be a good option for people who are morbidly obese, it is not a good option for people who are simply overweight an need to lose a few pounds. You are the financial equivalent of the latter, not the former. That is why no one thinks you should cash it out.

Folks here believe in doing things the right way even when it is hard. To do less is considered wussy-pants. A little pain and sacrifice to do things the right way rather than the easy way will make you more bad-ass. We like bad-assity here :)

SJ

  • Bristles
  • **
  • Posts: 67
Re: Should I cash out my 401k?
« Reply #34 on: September 17, 2012, 11:05:43 AM »
One thing I wonder is why so many wouldn't cash in this very tiny 401k to pay off high interest debt?

Cashing out your 401k is the financial equivalent of getting a lap band. For some people in very dire situations, it is a good option (or, at least, a less crappy option). But for most people in most situations it is just an easy way out. Where surgery may be a good option for people who are morbidly obese, it is not a good option for people who are simply overweight an need to lose a few pounds. You are the financial equivalent of the latter, not the former. That is why no one thinks you should cash it out.

Folks here believe in doing things the right way even when it is hard. To do less is considered wussy-pants. A little pain and sacrifice to do things the right way rather than the easy way will make you more bad-ass. We like bad-assity here :)

Right, and I'm with that.  My question is more this:  If I cash it out I lose $2k right now and get the high interest debt paid.  If I don't and pay off the high interest debt over 3 years, I lose maybe $2,500 to interest...so, which one seems more mustachian if the point is to save money?
"We are all in the gutter. But some of us are looking up at the stars."
   ~ Oscar Wilde

kkbmustang

  • Global Moderator
  • Senior Mustachian
  • *****
  • Posts: 1145
Re: Should I cash out my 401k?
« Reply #35 on: September 17, 2012, 11:09:43 AM »
SJ-

Are you taking into account the mandatory 20% federal income tax withholding in addition to the 10% excise tax? I'm not suggesting you cash out your 401(k), but wondering if you realize you'll be hit with the 20% mandatory withholding up front.

AJ

  • Senior Mustachian
  • *****
  • Posts: 728
  • Age: 31
  • Location: Oregon
Re: Should I cash out my 401k?
« Reply #36 on: September 17, 2012, 11:11:21 AM »
Right, and I'm with that.  My question is more this:  If I cash it out I lose $2k right now and get the high interest debt paid.  If I don't and pay off the high interest debt over 3 years, I lose maybe $2,500 to interest...so, which one seems more mustachian if the point is to save money?

You will also lose out on the market gains from the $20k you pull out. At 7%, that's an additional $3k you will lose by cashing out, for a total of $5k. By your calculation, that is double what you will pay in interest over the next two years. Is that Mustachian enough?

SJ

  • Bristles
  • **
  • Posts: 67
Re: Should I cash out my 401k?
« Reply #37 on: September 17, 2012, 11:11:47 AM »
SJ-

Are you taking into account the mandatory 20% federal income tax withholding in addition to the 10% excise tax? I'm not suggesting you cash out your 401(k), but wondering if you realize you'll be hit with the 20% mandatory withholding up front.

Yeah, I took that into account.  I'll get most (if not all) of that 20% back at tax time though since my tax liability this year is so low.
"We are all in the gutter. But some of us are looking up at the stars."
   ~ Oscar Wilde

SJ

  • Bristles
  • **
  • Posts: 67
Re: Should I cash out my 401k?
« Reply #38 on: September 17, 2012, 11:13:23 AM »
Right, and I'm with that.  My question is more this:  If I cash it out I lose $2k right now and get the high interest debt paid.  If I don't and pay off the high interest debt over 3 years, I lose maybe $2,500 to interest...so, which one seems more mustachian if the point is to save money?

You will also lose out on the market gains from the $20k you pull out. At 7%, that's an additional $3k you will lose by cashing out, for a total of $5k. By your calculation, that is double what you will pay in interest over the next two years. Is that Mustachian enough?

Yeah, that makes it more mustachian... (not sure we're getting 7%, probably less...but still).
"We are all in the gutter. But some of us are looking up at the stars."
   ~ Oscar Wilde

WaxOnWaxOff

  • Stubble
  • *
  • Posts: 29
Re: Should I cash out my 401k?
« Reply #39 on: September 17, 2012, 11:18:26 AM »
Quote from: SJ

Right, and I'm with that.  My question is more this:  If I cash it out I lose $2k right now and get the high interest debt paid.  If I don't and pay off the high interest debt over 3 years, I lose maybe $2,500 to interest...so, which one seems more mustachian if the point is to save money?

In my opinion, the point of being mustachian is to develop new habits that save money. The money-saving is the result, but the focus must be on the process and habits that get you there.

How did you get that high interest debt in the first place? Those are the habits you need to fix. If you cash out the 401k to pay down the CCs, what's stopping you from racking up the CCs in the future?

kkbmustang

  • Global Moderator
  • Senior Mustachian
  • *****
  • Posts: 1145
Re: Should I cash out my 401k?
« Reply #40 on: September 17, 2012, 11:20:00 AM »
With respect to the $200 going to the pharmacy each month, is that for deductibles and co-pays or something else? If deductibles/co-pays, do you have an HSA or FSA? If not, you might consider those as options to maximize your healthcare related dollars.

SJ

  • Bristles
  • **
  • Posts: 67
Re: Should I cash out my 401k?
« Reply #41 on: September 17, 2012, 11:21:50 AM »
Quote from: SJ

Right, and I'm with that.  My question is more this:  If I cash it out I lose $2k right now and get the high interest debt paid.  If I don't and pay off the high interest debt over 3 years, I lose maybe $2,500 to interest...so, which one seems more mustachian if the point is to save money?

In my opinion, the point of being mustachian is to develop new habits that save money. The money-saving is the result, but the focus must be on the process and habits that get you there.

How did you get that high interest debt in the first place? Those are the habits you need to fix. If you cash out the 401k to pay down the CCs, what's stopping you from racking up the CCs in the future?

Well, those debts were accumulated when we were making nearly 2x's what we are now and thought the money would keep flowing.  That was a different us...lol...we're far more mustachian about debt now.  So yeah, we wouldn't just go out and rack up more debt.
"We are all in the gutter. But some of us are looking up at the stars."
   ~ Oscar Wilde

SJ

  • Bristles
  • **
  • Posts: 67
Re: Should I cash out my 401k?
« Reply #42 on: September 17, 2012, 11:22:33 AM »
With respect to the $200 going to the pharmacy each month, is that for deductibles and co-pays or something else? If deductibles/co-pays, do you have an HSA or FSA? If not, you might consider those as options to maximize your healthcare related dollars.

No, that's cash payment since I have no insurance and a chronic medical condition.  No real way to reduce that right now.
"We are all in the gutter. But some of us are looking up at the stars."
   ~ Oscar Wilde

kkbmustang

  • Global Moderator
  • Senior Mustachian
  • *****
  • Posts: 1145
Re: Should I cash out my 401k?
« Reply #43 on: September 17, 2012, 11:24:17 AM »
Does your wife have health insurance? If you lost your job, you can get on her plan if you elect do so within a specified period of time.

SJ

  • Bristles
  • **
  • Posts: 67
Re: Should I cash out my 401k?
« Reply #44 on: September 17, 2012, 11:27:34 AM »
Does your wife have health insurance? If you lost your job, you can get on her plan if you elect do so within a specified period of time.

She does, but unfortunately it's only a sweet price for the employee.  To add me would be like $400 more/month...lol!  But, she was able to ad me to dental/vision for a good price.
"We are all in the gutter. But some of us are looking up at the stars."
   ~ Oscar Wilde

SJ

  • Bristles
  • **
  • Posts: 67
Re: Should I cash out my 401k?
« Reply #45 on: September 17, 2012, 11:38:06 AM »
What do you have for livestock? Is the livestock itself worth anything? I think getting rid of the livestock until you can afford to raise livestock is a good idea. What if you sold your livestock and applied that money towards cc debit. Make the deal with your self that once all the debt is gone and you can pay cash for more livestock.

This is one thing I didn't account for in the above.  We're under contract with these and owe about $10k, BUT it is a no interest/no payments contract that doesn't come due for more than 2 years still.  So I didn't include it because by then we'll either have animal sales that will pay it off, OR we'll sell our current animals to pay it off if it comes to that as they are worth more than we bought them for.
"We are all in the gutter. But some of us are looking up at the stars."
   ~ Oscar Wilde

JohnGalt

  • Magnum
  • ****
  • Posts: 416
  • Age: 29
  • Location: Dallas/Ft Worth Area
Re: Should I cash out my 401k?
« Reply #46 on: September 17, 2012, 11:40:29 AM »
What are your long term goals?

SJ

  • Bristles
  • **
  • Posts: 67
Re: Should I cash out my 401k?
« Reply #47 on: September 17, 2012, 11:45:41 AM »
What are your long term goals?

Well...hmm...depends on what you mean by long term.  Long-ish term we want to be completely out of debt, including our mortgage (though we're not sure how long we'll stay in this house, we figure 5-7 years and then if the livestock business is doing well we'll need more acreage).
"We are all in the gutter. But some of us are looking up at the stars."
   ~ Oscar Wilde

Use it up, wear it out...

  • Handlebar
  • ***
  • Posts: 224
  • Location: Brooklyn, NYC
Re: Should I cash out my 401k?
« Reply #48 on: September 17, 2012, 12:06:27 PM »
Just to put some "real" numbers out there...

I estimate that over 3 years (the time horizon you suggested, SJ) if you're paying the minimum on your credit cards, you'll pay about $4800 in interest.

Ignoring the 20% minimum withholding under the assumption you'll get that back at tax time, you'll need to take $14.7K out of your 401K to pay your $13.2K in debt and cover the 10% excise tax. Assuming a 7% market return AND that you put your $500 / month savings back into the market at $6K / year, you're giving up $661 in additional interest over the same 3-year period.

It sounds like you need the money, however, so you may not put it back in the market (too risky for short-term investing), so if you put the savings into 4% bonds, you're foregoing about $867 instead.

If you spend the money, or lump it in a savings account, you're foregoing the entire $3300 in interest.

If, on the other hand, you follow the recommendations of the "buck up" crowd on this thread, I figure you'll pay about $1250 over 3 years paying those loans down at $500 / month + your usual car loan payment, starting with the highest rate and working down.

So, here are your scenarios:
1 - pay down and put back into the market @ 7%
2 - pay down and put into bonds @ 4%
3 - pay down and the savings get used for whatever
4 - find $500 / mo in savings

scenario10% penaltyforegone interestsaved interestsavings / (expense)
1$4600$661$4800($461)
2$4600$867$4800($667)
3$4600$3300$4800($3100)
4$0$0$3550($1250)

Whatever you decide, just make sure you don't end up like MoonPilgrim's beau:
http://www.mrmoneymustache.com/forum/journals/moonpilgrim's-tough-stuff/msg24877/#msg24877
...Make it do or do without!

Jamesqf

  • Senior Mustachian
  • *****
  • Posts: 4055
Re: Should I cash out my 401k?
« Reply #49 on: September 17, 2012, 12:14:54 PM »
You want to cash out the 401K so you can pay off debts/save in case unexpected emergencies put you in a really bad place?  I suggest that you're not thinking it through.  Cashing out the 401K (or as much of it as needed) is what you do IF you hit one of those really bad places.

As others have said, it looks as though there are many places where you could trim money.  You may need cell phones, but you could switch to pay-as-you go, and save maybe $100/month.  Also look at the car: the loan costs and gas seem to be higher than they could be.  If you can sell the current car, get out of the loan, and buy something economical instead, there's another $100/month or so.  You may think each one is just nickel & dime stuff, but they add up.