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Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: SJ on September 16, 2012, 08:54:46 AM

Title: Should I cash out my 401k?
Post by: SJ 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?
Title: Re: Should I cash out my 401k?
Post by: TheDude 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.
Title: Re: Should I cash out my 401k?
Post by: SJ 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.
Title: Re: Should I cash out my 401k?
Post by: arebelspy 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.
Title: Re: Should I cash out my 401k?
Post by: SJ 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.
Title: Re: Should I cash out my 401k?
Post by: arebelspy 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.
Title: Re: Should I cash out my 401k?
Post by: ch12 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?
Title: Re: Should I cash out my 401k?
Post by: SJ 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?
Title: Re: Should I cash out my 401k?
Post by: ch12 on September 16, 2012, 11:28:33 AM
I think that I'm confused about you being required to pay for their plane tickets.
Title: Re: Should I cash out my 401k?
Post by: SJ 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?
Title: Re: Should I cash out my 401k?
Post by: ch12 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.
Title: Re: Should I cash out my 401k?
Post by: SJ 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.  :)
Title: Re: Should I cash out my 401k?
Post by: arebelspy 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.



;)
Title: Re: Should I cash out my 401k?
Post by: TheDude 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.
Title: Re: Should I cash out my 401k?
Post by: SJ 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.
Title: Re: Should I cash out my 401k?
Post by: arebelspy 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.
Title: Re: Should I cash out my 401k?
Post by: SJ 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.
Title: Re: Should I cash out my 401k?
Post by: AJ 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.
Title: Re: Should I cash out my 401k?
Post by: SJ 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!
Title: Re: Should I cash out my 401k?
Post by: arebelspy 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.

Title: Re: Should I cash out my 401k?
Post by: JohnGalt 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.
Title: Re: Should I cash out my 401k?
Post by: SJ 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!
Title: Re: Should I cash out my 401k?
Post by: DocCyane 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.
Title: Re: Should I cash out my 401k?
Post by: SJ 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

Title: Re: Should I cash out my 401k?
Post by: arebelspy 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.
Title: Re: Should I cash out my 401k?
Post by: AJ 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.
Title: Re: Should I cash out my 401k?
Post by: kkbmustang 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.
Title: Re: Should I cash out my 401k?
Post by: AJ 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:

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.

Title: Re: Should I cash out my 401k?
Post by: SJ 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).
Title: Re: Should I cash out my 401k?
Post by: WaxOnWaxOff 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.
Title: Re: Should I cash out my 401k?
Post by: TheDude 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.
Title: Re: Should I cash out my 401k?
Post by: kkbmustang 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.
Title: Re: Should I cash out my 401k?
Post by: kkbmustang on September 17, 2012, 10:52:21 AM
Obviously haven't figured out the quoting thing...
Title: Re: Should I cash out my 401k?
Post by: AJ 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 :)
Title: Re: Should I cash out my 401k?
Post by: SJ 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?
Title: Re: Should I cash out my 401k?
Post by: kkbmustang 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.
Title: Re: Should I cash out my 401k?
Post by: AJ 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?
Title: Re: Should I cash out my 401k?
Post by: SJ 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.
Title: Re: Should I cash out my 401k?
Post by: SJ 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).
Title: Re: Should I cash out my 401k?
Post by: WaxOnWaxOff 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?
Title: Re: Should I cash out my 401k?
Post by: kkbmustang 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.
Title: Re: Should I cash out my 401k?
Post by: SJ 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.
Title: Re: Should I cash out my 401k?
Post by: SJ 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.
Title: Re: Should I cash out my 401k?
Post by: kkbmustang 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.
Title: Re: Should I cash out my 401k?
Post by: SJ 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.
Title: Re: Should I cash out my 401k?
Post by: SJ 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.
Title: Re: Should I cash out my 401k?
Post by: JohnGalt on September 17, 2012, 11:40:29 AM
What are your long term goals?
Title: Re: Should I cash out my 401k?
Post by: SJ 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).
Title: Re: Should I cash out my 401k?
Post by: Use it up, wear it out... 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 (http://www.mrmoneymustache.com/forum/journals/moonpilgrim's-tough-stuff/msg24877/#msg24877)
Title: Re: Should I cash out my 401k?
Post by: Jamesqf 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.
Title: Re: Should I cash out my 401k?
Post by: Lars on September 17, 2012, 12:15:39 PM
Late comer to the thread here.

SJ,

You proposed early withdrawal of 401k at a cost of 2.1K in early withdrawal penalties. The forum counter proposed making cuts of $500/month in monthly budget and applying in to debt in addition to current payments at a cost of $1k in interest (determined via online debt snowball calculator - would take 18 months). Where are you at? Have you accepted the forum counter-proposal?

Title: Re: Should I cash out my 401k?
Post by: SJ on September 17, 2012, 12:20:35 PM
Thanks everyone for your thoughtful and helpful replies.  Still not sure what we're going to do, we're both mulling it all over now.  Admittedly, part of us really just needs the peace of mind that will come with having that stuff paid off, and having more breathing room every month, and that alone is worth the 10% penalty it'll cost us...getting laid off and then 6 months later taking a huge paycut will do wonders to your confidence I guess.
Title: Re: Should I cash out my 401k?
Post by: AJ on September 17, 2012, 12:24:22 PM
Alternatively, can you borrow from your 401k instead? If you take a $8400 loan, you could trade the $255 vehicle loan payment and $225 property visa for an approx. $160 401k loan payment (guessing 5% over 60 months). You will still lose the market gains, but you won't pay the 10% penalty. That frees up $320, plus you may be able to reduce your insurance or raise your deductible since the vehicle won't be financed anymore. Just one more option to consider...

As a side note, have you read any Dave Ramsey books? He is controversial here, but I think you might find him helpful. DH and I went through his class and found it well worth the cost. But you could probably find his books at your library for free.
Title: Re: Should I cash out my 401k?
Post by: SJ on September 17, 2012, 12:25:44 PM
Alternatively, can you borrow from your 401k instead? If you take a $8400 loan, you could trade the $255 vehicle loan payment and $225 property visa for an approx. $160 401k loan payment (guessing 5% over 60 months). You will still lose the market gains, but you won't pay the 10% penalty. That frees up $320, plus you may be able to reduce your insurance or raise your deductible since the vehicle won't be financed anymore. Just one more option to consider...

As a side note, have you read any Dave Ramsey books? He is controversial here, but I think you might find him helpful. DH and I went through his class and found it well worth the cost. But you could probably find his books at your library for free.

I would have done that long ago, but since I'm no longer employed with that company, they don't allow loans.  Lame.

Thanks for the tip, I've heard of him, might have read some stuff in the past, but I can't recall.  I'll check it out.
Title: Re: Should I cash out my 401k?
Post by: James on September 17, 2012, 12:49:12 PM
What vehicle do you have?  How much do you owe, and how much equity do you have?

Have you checked for options with auto insurance?  That seems super high, maybe because you vehicle is worth too much for your situation?  If not maybe you are probably paying too much for insurance?

Cell phones should be dropped to pre-paid or something well under what you are paying.  You can't afford the regular plan like that.

Internet, internet radio, internet backup and Netflix?  This needs to be cut back big time.  Are you on satellite internet?  The radio should go, the Netflix should drop down to $8 if anything.  What is the backup?  If it is for your client then they should be paying those things?

Groceries and eating out should be cut back, I don't see any reason you couldn't get that down to $450 total saving $288.


I just can't see any reason to keep spending at your level given your income and debt.
Title: Re: Should I cash out my 401k?
Post by: Sylly on September 17, 2012, 12:59:27 PM
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?

So I was curious to see how much interest you'd be paying if you go the the recommended way (i.e. cut expenses, continue and increase monthly debt payments).

Someone correct me if I'm calculating this wrong. My method is to figure out what the beginning balance is each month, calculate the monthly interest, subtract payment, use end balance as next month's starting balance, repeat until zero.

The three debts you want to pay off with the 401k are: CC1 @ 9.9%, CC2 @ 19%, and car loan @ 7%.

I assume above quoted rates are APYs. Monthly interest is calculated as (1+ APY)^(1/12) - 1. I round off monthly interest to higher tenth (100th for car) of percentage point to be conservative.

Let's look at the car. Looking at the funny number, I'll assume the car payment is the minimum. Keeping at that rate, you'll pay it off on the 10 month, for a total interest of $74.

CC1, 6000 @ 9.9%. Currently paid at $225/month.

CC2, 4800 @ 19.9%. Currently paid at $50/month. I assume that's because it's not accumulating interest until November.

Suppose you stay with your current debt payment, just juggling the amount to pay the CC2 first, and keeping at minimum with the others. You don't say what the minimum for CC1 is, but let's just say it's $50. So starting November, I switched up the payments for CC1 (to $50) and CC2 ($225).

On the 11th month, you have the amount you had been using for your car payment to add, raising payment to CC2 to $480/month. At this rate, you'll pay it off on month 18, for a total of $752 in interest.

Now you have this extra $480 to throw into CC1, which you'll then be able to finish at month 32 for a total of $1126 interest.
Overall, you'll be debt free in 32 month, having paid a little less than $2k in interest.

That's without cutting expenses.
Throwing in an extra $50/month changes it to 27 months, ~$1750.
Throw in another $50/month, and you'll cut 150 in interest.

Say you cut $200/month, and you'll be debt free in 23 months, and spent only a little over $1300 in interest.
Let's go crazy and cut $500/month. The numbers change to 17 months and $900+.

There's some assumptions I've made in there, and I probably don't get my calculations accurate to the dollar, but I'm sure it's not too far off. Do you see now why everyone here is insisting you'd be making a bad decision to pull out that 401k instead of cutting your expenses?
Title: Re: Should I cash out my 401k?
Post by: JohnGalt on September 17, 2012, 01:36:44 PM

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).

So, say you clear out the 401k and the net from that knocks out your non-mortgage debts.  What's your plan for paying off the $250k mortgage in 5-7 years?  I haven't done the math - but I don't think your cash flow, even without the debt payments will get you there and you don't seem open to making any changes in your budget. 

Do you expect the livestock business to pick up enough that it will take care of it?  Will this then become a full time job for you?  Will it net enough to replace both your current income and the increases you'll need to pay for the mortgage (which sounds like could potentially go even higher if you buy more land)?

Let's assume that between working and the business that it does pay off all debt in 5-7 years.  What next?

Will you do any investing?  If not, do you plan on just working the livestock business forever?  What happens if it fails down the line?

Did you know that stock investing is not the only way to use the old 401k?  You can roll it into a self directed IRA and then invest in land, physical gold, or whatever else would make you more comfortable than the stock market.  You could also roll it first into an IRA and then into a self directed roth IRA since you're in a low tax bracket.  Then, in 5 years, the money will be vested in the roth ira and can be withdrawn tax and penalty free at any time or left in whatever investment makes you comfortable. 
-Based on your responses, I think this is the best option for you because...

1. Short term - it forces you to get used to having those debt payment in your budget for an extended period so that, when they are paid off, it is easy for you to just roll with saving that money.
2. No 10% penalty, but you will have access to the money in 5 years should you need it.
3. It keeps you investing in something besides just the livestock business
4. It locks in your currently low taxes on that money

Do this with accessing the money now (with the 10% penalty) if you are in dire risk of losing the house as the back up option
Title: Re: Should I cash out my 401k?
Post by: SJ on September 18, 2012, 05:31:35 AM
Thanks Sylly (and Use it up, wear it out...) for doing some serious maths!  One thing on yours Sylly is that the payment I listed for both CC's is the current minimum, so they can't be swapped around.  But it does illustrate a good idea of what I might pay in interest were I actually able to dump that much into them every month.  That might be possible if I were able to reduce monthly expenses by a fairly large amount. 

The most realistic number is looking like $1,500-2,000 or so in interest based on paying them off over the next 3 years or so.  We still feel after all this discussion that our peace of mind and our monthly breathing room is worth the extra $500-1,000 in penalty we'll be paying just to get this stuff off our shoulders.  That said, we're still discussing other ways to move forward without cashing it out.  Decisions, decisions..
Title: Re: Should I cash out my 401k?
Post by: SJ on September 18, 2012, 05:37:13 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).

So, say you clear out the 401k and the net from that knocks out your non-mortgage debts.  What's your plan for paying off the $250k mortgage in 5-7 years?  I haven't done the math - but I don't think your cash flow, even without the debt payments will get you there and you don't seem open to making any changes in your budget.

The plan wasn't to pay it off entirely by then, IF we need to move for larger acreage.  Ideally we'd have it paid off in 15 years or so, earlier if our financial situation gets better.  If we need to move by then we'll sell it and hopefully have a nice bit of equity already. 

Do you expect the livestock business to pick up enough that it will take care of it?  Will this then become a full time job for you?  Will it net enough to replace both your current income and the increases you'll need to pay for the mortgage (which sounds like could potentially go even higher if you buy more land)?

Let's assume that between working and the business that it does pay off all debt in 5-7 years.  What next?

Will you do any investing?  If not, do you plan on just working the livestock business forever?  What happens if it fails down the line?

I have some other business ideas that may or may not pan out as well.  So livestock is just one part of our future plans. 

Did you know that stock investing is not the only way to use the old 401k?  You can roll it into a self directed IRA and then invest in land, physical gold, or whatever else would make you more comfortable than the stock market.  You could also roll it first into an IRA and then into a self directed roth IRA since you're in a low tax bracket.  Then, in 5 years, the money will be vested in the roth ira and can be withdrawn tax and penalty free at any time or left in whatever investment makes you comfortable. 
-Based on your responses, I think this is the best option for you because...

1. Short term - it forces you to get used to having those debt payment in your budget for an extended period so that, when they are paid off, it is easy for you to just roll with saving that money.
2. No 10% penalty, but you will have access to the money in 5 years should you need it.
3. It keeps you investing in something besides just the livestock business
4. It locks in your currently low taxes on that money

Do this with accessing the money now (with the 10% penalty) if you are in dire risk of losing the house as the back up option

Yes, that's certainly one option I'm aware of, but as you noted the money can't be touched still for 5 years.  So if we decide to not cash it out, we'll definitely be looking to move it to an IRA.
Title: Re: Should I cash out my 401k?
Post by: Scuba Stache on September 18, 2012, 07:26:49 AM
I'm pretty surprised this thread has made it two pages without much tough love...and I play a terrible bad guy but will give it a shot. You have been mentioning the threat of homelessness and financial disaster, but haven't caved into giving up $1 of your current expenses, not even internet radio. I'm afraid wussypants syndrome has made an appearance. As the community has said, the obvious move here is to cut expenses and train your frugality muscles to eliminate the debt. This process alone is MUCH more valuable than the talk of ~1-2k immediate savings over 401k penalty. You need to develop a thorough understanding of your true base expenses(internet radio not included), you do not learn by taking the shortcut. Also as mentioned car loans aren't allowed in these parts, sell it and purchase an older vehicle while simultaneously saving on car insurance.
Title: Re: Should I cash out my 401k?
Post by: SJ on September 18, 2012, 07:36:47 AM
I'm pretty surprised this thread has made it two pages without much tough love...and I play a terrible bad guy but will give it a shot. You have been mentioning the threat of homelessness and financial disaster, but haven't caved into giving up $1 of your current expenses, not even internet radio. I'm afraid wussypants syndrome has made an appearance. As the community has said, the obvious move here is to cut expenses and train your frugality muscles to eliminate the debt. This process alone is MUCH more valuable than the talk of ~1-2k immediate savings over 401k penalty. You need to develop a thorough understanding of your true base expenses(internet radio not included), you do not learn by taking the shortcut. Also as mentioned car loans aren't allowed in these parts, sell it and purchase an older vehicle while simultaneously saving on car insurance.

There's been plenty of tough love telling me I'm in a house I can't afford, sell my animals, eat beans and rice and stop spending so much on groceries, get pre-paid phones, etc.  It's been made pretty clear that I don't cut the stachian mustard compared to many of you, but so be it, we're all on the path and it's a spectrum that we're working our way towards the hard-core end of.

The vehicle is old, actually...a 98 with 150k on it.  I was just stupid and didn't pay it off early as planned before the layoff hit.

But yeah, cashing the 401k is a shortcut...it's treating the debt like an emergency and paying it the F off, even if it'll be painful taking the penalty to do so; it's a different kind of pain than cutting things I don't want to out of my budget, but it's pain all the same and a lesson learned I say.  And it also has the nice effect of freeing up monthly money I'm going to need the next time a $1,500 car repair is required (like it was a few months ago)...how would I handle that now with my $350 (or $500 if I go mega-stachian) free dough each month...put it on the card?  Yup. 
Title: Re: Should I cash out my 401k?
Post by: Scuba Stache on September 18, 2012, 08:07:41 AM
Fair enough on the car situation - retracted
Everybody here has learning to do. My nudge was simply to get you to concede some of your current "needs". It is these small changes that get the ball rolling mentally and financially. You should go through your posted budget and justify each item (items such as grocery justify segments of it not as a whole) - the community doesn't need to see this, keep it on your personal computer. Again start with internet radio... I use Pandora 7 days a week and never felt the need to upgrade.

On the tips side maybe you could do some credit card arbitrage and get a new card with free balance transfer/ no interest for xx months.
Call the cable company and try to get a new promotional rate.
Shop for new car insurance

You are in debt emergency mode as you mentioned, this means comparing each budget item to your stated concerns
Internet Radio < threat of homelessness
Dinner out tonight because I'm tired < financial disaster
Title: Re: Should I cash out my 401k?
Post by: twinge on September 18, 2012, 08:10:33 AM
Quote
how would I handle that now with my $350 (or $500 if I go mega-stachian) free dough each month...put it on the card?  Yup.

I think the point everyone is making is that if and when that happens and you're truly stuck you can put it on the card, cash out the 401k and pay off the card then.  If the math of that makes sense.  But at this point, what you can do with NO penalty and NO reduction to your retirement account is trim your expenses.  And when people make all those suggestions of places to trim it's not that you have to do all of them but select among them in whatever way will free up some extra cash.

If you want to free up cash flow quicker, save up as much as you can and knock out the smallest debt payment asap.  That way you have one less minimum payment in the budget.  And then you have $30 a month to add to the next payment you're going to knock out.
 
If you can do that regularly until the debt is gone and you don't happen to have a major car repair, flood, medical bill etc. you end up with the debt gone and your 401k intact.  The 401k balance is always there for your "peace of mind" ... so leave it there and do the harder work of trimming your expenses first.  The math tells you that is the correct approach and your lifestyle is out of balance to the point that if you do cash out the account you may  be in this position again (without a 401k account to cash out) not too long from now if you don't make the lifestyle adjustments anyway. There's just not enough space in your expenses to handle the variable expenses that come up when you own things and save for retirement etc.
Title: Re: Should I cash out my 401k?
Post by: SJ on September 18, 2012, 08:20:37 AM
Fair enough on the car situation - retracted
Everybody here has learning to do. My nudge was simply to get you to concede some of your current "needs". It is these small changes that get the ball rolling mentally and financially. You should go through your posted budget and justify each item (items such as grocery justify segments of it not as a whole) - the community doesn't need to see this, keep it on your personal computer. Again start with internet radio... I use Pandora 7 days a week and never felt the need to upgrade.

On the tips side maybe you could do some credit card arbitrage and get a new card with free balance transfer/ no interest for xx months.
Call the cable company and try to get a new promotional rate.
Shop for new car insurance

You are in debt emergency mode as you mentioned, this means comparing each budget item to your stated concerns
Internet Radio < threat of homelessness
Dinner out tonight because I'm tired < financial disaster

I appreciate the responses, I really do.  I'm definitely not hard-core, but we're getting there.  A year ago we were in a totally different place and spent money like crazy.  I mean, if it was less than $100 and I wanted it, I didn't even think about it, I just bought it...I guess that's what I thought I could do when I had thousands of dollars of "excess" funds every month.  Man, if only I had gotten on this bandwagon sooner!  So yeah, we've come a long way even though it may not look like it from this thread.

Card arbitrage is a great idea and one I might be able to pull off...then again, maybe not with all this debt. 

No cable here, thankfully!  As for internet, I have pretty much the only high speed option out here (which I do need due to video conferencing "needs" with my out of state children).  The other options, while cheaper, wouldn't even run Skype properly. 

We rarely eat out...most of those expenses for eating out involved birthday or holiday celebration, or purchases at gas stations, not just laziness.  We can't even so much as get a pizza out here, and the nearest fast food place is nearly 10 miles away.

I've shopped around for car insurance and can't find much better.  The figure listed is for two vehicles (one is paid off), one with full coverage due to the loan.  If I can pay that off, I can also save on insurance.
Title: Re: Should I cash out my 401k?
Post by: arebelspy on September 18, 2012, 08:29:36 AM
Scuba's right.  There needs to be more face punching here.

A few have tried (John Galt is usually pretty good at it), but SJ keeps shrugging off and making excuses.

it's a spectrum that we're working our way towards the hard-core end of.

I'm definitely not hard-core, but we're getting there.

You keep saying this, but I don't think you know what it means.  Literally, I think you don't understand.

Until your expenses are < 1k/month, I don't think you're approaching hard core.

You are nowhere close to even being Mustachian in your spending, let alone getting "hard core."

Your spending is atrocious, you have a refusal to change it, and you shoot down every single suggestion with excuses.

Go punch yourself in the face.  Or make another excuse as to why you shouldn't, and everything is fine.
Title: Re: Should I cash out my 401k?
Post by: Another Reader on September 18, 2012, 09:34:05 AM
I don't see any comments on the second property, the one that's on the Visa card.  Why did you buy this property?  Given the change in your financial circumstances, is this something that would make sense to sell?  Any equity could go to paying off the other debts and your monthly payments would decrease by the amount of that Visa payment.

The recurring theme in the OP's thought process and in the thought process of so many people asking for guidance on this forum is purchasing things they really can't afford today because they plan to use them in the future and can buy the item today at a good price.  Examples are a big house or a multi-passenger van because a poster intends to have children.  I see some of that rationalizing here with the properties and the livestock.  Your income has been severely cut, and I have not seen a discussion of how you intend to get it back where it was.  Yet you hold on to things like property and animals that you really cannot afford on a permanently reduced income.  It appears you are trying to start a business (livestock) that will take expensive assets and a lot of time and working capital to make successful.  This is not the time to do this as you simply do not have the working capital to operate an unprofitable business with your reduced income.

In your shoes, I would take a hard look at what I would have to do to live reasonably comfortably and to be able to save significant sums of money on the current family income.  Then I would look at what it would realistically take (moving. more education, etc.) to get my income back to what it was. 

Eventually you will need to make a decision to dramatically reduce the lifestyle or to do whatever is needed to increase the family income.  Cashing out the 401k is a band-aid.  In my view, you will fail long term unless you plan more realistically.
Title: Re: Should I cash out my 401k?
Post by: Sylly on September 18, 2012, 09:40:48 AM
... eat beans and rice and stop spending so much on groceries, get pre-paid phones, etc.  It's been made pretty clear that I don't cut the stachian mustard compared to many of you, but so be it, we're all on the path and it's a spectrum that we're working our way towards the hard-core end of.

I'm not a hardcore mustachian by any means, so I'll try to address these points for you:

Groceries: Sounds like you're in a household of two, with the need to feed your client as well. Say it's for 2.5 people then, unless you need to feed your client for every meal. Compared to your grocery spending, mine (for two people) is less than half (closer to a third actually), and I am by no means on a rice and beans diet. I don't deprive myself either, and my household meals tend to actually be fairly meat-heavy, with some specialty items because of dietary restrictions. So I find it hard to believe that there's no room to reduce your grocery spending by $200 without sacrificing the quality of food. I'm sure there are posts and/or threads here that cover tips & tricks to cut grocery spending. Try those.

Phones: There are people much better versed in how to get the most out of a low cost phone plan, but this is my trick -- only pay for a plan that covers your need and no more. How many minutes do you really need? Do you really need that data plan, or is it just nice to have? End result, for less than what you pay, my plan covers 4 people.

Nobody's giving you grief for not being hardcore Mustachian. People are giving you grief because you shoot down every suggestion to help you move any distance toward the Mustachian end of the spectrum.

Edit:
Even with keeping payment to CC1 at minimum of 225, and not reducing expenses, my spreadsheet says your total interest cost is still under 2k, and debt done in 30 months.

I understand your desire for peace of mind. But keep in mind you're not only losing the withdrawal penalty, you're also losing any potential investment gain from that stash.
Title: Re: Should I cash out my 401k?
Post by: jpo on September 18, 2012, 10:20:36 AM
It sounds to me like part of what's going on here is this from ERE (http://earlyretirementextreme.com/how-i-live-on-7000-per-year.html):
Quote
The second and more important aspect is the $7,000/year. The Wheaton Eco-scale (http://www.permies.com/permaculture-forums/3069_0/permaculture/the-wheaton-eco-scale) explains this in a brilliant way. Consider people living at different budgets, e.g. $100k, $80k, $60k, $50k, $40k, $30k $20k, $15k, $10k, $7.5k, $5k, $2.5, $1k, and $0k. Now, what Wheaton observes is that people who spend one or two levels below you are inspiring to you in terms of budget reductions. People who spend three levels below you are slightly nutty and people who spend four or more levels below your level are crazy or downright extreme. This holds no matter where you are. If you spend 60k, then 50k and 40k is inspiring, 30k is nutty and 20k is crazy. If you spend 30k, then 20k and 15k is inspiring, 10k is nutty, and 7.5k is crazy. Conversely, people who spend a couple of levels above you are considered prodigal and wasteful.
OP is several spending levels up from the average Mustachian on these boards, so we look crazy to him and he looks wasteful to us. My guess is that he's already cut lots of spending and feels like his frugality muscles are already flexed to the max.

I don't see any comments on the second property, the one that's on the Visa card.  Why did you buy this property?  Given the change in your financial circumstances, is this something that would make sense to sell?  Any equity could go to paying off the other debts and your monthly payments would decrease by the amount of that Visa payment.
Supposedly it would take a few years to liquidate this.
Title: Re: Should I cash out my 401k?
Post by: AJ on September 18, 2012, 12:04:14 PM
OP is several spending levels up from the average Mustachian on these boards, so we look crazy to him and he looks wasteful to us. My guess is that he's already cut lots of spending and feels like his frugality muscles are already flexed to the max.

Maybe...but I expect this has more to do with the ratio than the actual expenses. If the OP made $250k, I think people would say "you could do better, but at least you're below your means." But the OP has basically said they live at or above their means (once you factor irregular expenses) but is still unwilling to lower their standard of living.

Plus, he came here asking for honest advice and got it, it just wasn't what he wanted to hear. There is something supremely grating about people who act like they want help, but then come up with excuses why their situation is out of their control. People have offered 1001 reasons cashing out the 401k is a bad idea, but he still says he wants to do it. If he was going to cash it out anyway, why even bother asking the question?
Title: Re: Should I cash out my 401k?
Post by: SJ on September 18, 2012, 12:44:30 PM
Scuba's right.  There needs to be more face punching here.

A few have tried (John Galt is usually pretty good at it), but SJ keeps shrugging off and making excuses.

it's a spectrum that we're working our way towards the hard-core end of.

I'm definitely not hard-core, but we're getting there.

You keep saying this, but I don't think you know what it means.  Literally, I think you don't understand.

Until your expenses are < 1k/month, I don't think you're approaching hard core.

You are nowhere close to even being Mustachian in your spending, let alone getting "hard core."

Your spending is atrocious, you have a refusal to change it, and you shoot down every single suggestion with excuses.

Go punch yourself in the face.  Or make another excuse as to why you shouldn't, and everything is fine.

Atrocious?  Wow, really?  I think even you know that's hardly true.  Not hardcore?  Yeah.  But atrocious?
Title: Re: Should I cash out my 401k?
Post by: SJ on September 18, 2012, 12:54:48 PM
... eat beans and rice and stop spending so much on groceries, get pre-paid phones, etc.  It's been made pretty clear that I don't cut the stachian mustard compared to many of you, but so be it, we're all on the path and it's a spectrum that we're working our way towards the hard-core end of.

I'm not a hardcore mustachian by any means, so I'll try to address these points for you:

Groceries: Sounds like you're in a household of two, with the need to feed your client as well. Say it's for 2.5 people then, unless you need to feed your client for every meal. Compared to your grocery spending, mine (for two people) is less than half (closer to a third actually), and I am by no means on a rice and beans diet. I don't deprive myself either, and my household meals tend to actually be fairly meat-heavy, with some specialty items because of dietary restrictions. So I find it hard to believe that there's no room to reduce your grocery spending by $200 without sacrificing the quality of food. I'm sure there are posts and/or threads here that cover tips & tricks to cut grocery spending. Try those.

Yes, I agree, I can get it down by $100-200.  But it's a full 3 people as he is basically a member of the family since he lives here (actually, 3.5 considering that my wife and I often eat 2 meals a day, my client eats a full 3 and then some if I let him). 

Phones: There are people much better versed in how to get the most out of a low cost phone plan, but this is my trick -- only pay for a plan that covers your need and no more. How many minutes do you really need? Do you really need that data plan, or is it just nice to have? End result, for less than what you pay, my plan covers 4 people.

We're actually on a low minute plan, and it's a family plan.  I could remove texting, but I use it a lot.  A convenience for sure, but one I'm not yet willing to get rid of.  We spend a lot of time in cars, in doctors office, waiting around for buses...having smart phones has been wonderful and it's a luxury I'm not going to give up any time soon.  I know what it's costing me, but frankly it's worth it.

Title: Re: Should I cash out my 401k?
Post by: JohnGalt on September 18, 2012, 01:26:14 PM
It seems to me like you're still reeling from the layoff from your high paying job and have not come to terms with the fact that instead of being on the upper end of the income spectrum - you are now closer to the middle.  Because of this, you're still comparing yourself to your old peers (like the ones with the more expensive properties in your area) and you feel like you are in bad shape, one car repair away from homelessness.

This has you thinking emotionally and short term rather than logically and long term.
It has you shooting down nearly every suggestion that has been made here.
Forget about where you used to be and look at where you are vs where you want to be 5, 10, 20 years from now. 
Go ahead and raid the 401k now to give you some short term peace of mind, $20k is not going to make or break you in the long run - but at some point you need to take a hard look at where you want to be and figure out if your current habits will get you there in the time frame you want. 
Title: Re: Should I cash out my 401k?
Post by: SJ on September 18, 2012, 01:48:08 PM
It seems to me like you're still reeling from the layoff from your high paying job and have not come to terms with the fact that instead of being on the upper end of the income spectrum - you are now closer to the middle.  Because of this, you're still comparing yourself to your old peers (like the ones with the more expensive properties in your area) and you feel like you are in bad shape, one car repair away from homelessness.

I'm not really comparing myself to anyone, especially not my neighbors.  Most of the homes I consider excessive, especially the big ones that are in the millions!  I'm proud of my little home that perfectly fits our needs (even if we could use one more bedroom).  I actually feel like we're very fortunate to be where we are in life.  Living in a modest but nice home out of the burbs and closer to nature, 3 great kids, a superb wife, don't have to trudge in to some crappy cube farm on a daily basis, my chronic medical condition under control more than it ever has been...yeah, life is pretty good right now. 

When I say one car repair away from homelessness, I guess that's a bit of an exaggeration...or is it?  With only a few hundred dollars to spare every month, if my client decided to leave, or even go on vacation for a week and in that same month I get hit with even a $500 expense I wasn't expecting, I'd not be able to pay my mortgage.  Sure, they wouldn't foreclose that fast, but that would put me behind enough that without outside help I might not recover in time to stop foreclosure. 

Forget about where you used to be and look at where you are vs where you want to be 5, 10, 20 years from now. 
Go ahead and raid the 401k now to give you some short term peace of mind, $20k is not going to make or break you in the long run - but at some point you need to take a hard look at where you want to be and figure out if your current habits will get you there in the time frame you want.

Glad someone sees that raiding a minuscule 401k isn't the end of the world and won't put us off FI in the long run.  Still haven't decided we're doing it though it's certainly a better option than the one I spelled out above, which isn't out of the realm of possibility.

And yeah, we are reassessing everything right now and trying to figure out first what our long term plan is, and then how we're going to get there.  It's been a rough and tumble past year and we're just really needing some room to breath and a clear path forward.
Title: Re: Should I cash out my 401k?
Post by: arebelspy on September 18, 2012, 06:58:06 PM
Will someone less lazy than I go through and count the number of excuses SJ has made in this thread?  It's gotta be over twenty.  At this point I feel like you're just trolling us, that this is all made up to see how ridiculous you can be.

If it's true though SJ, I feel like today's MMM post was written for you:
www.mrmoneymustache.com/2012/09/18/is-it-convenient-would-i-enjoy-it-wrong-question/

Specifically:
Quote
If you still need to work for money, or at the very least, if you’re not saving at least 50% of your take-home pay, you can not afford it. Where “it” is anything.

You not only aren't saving 50%... You aren't saving anything, you're spending everything! And worse, you're doing it with massive debt!  Bad, terrible, high interest debt!

You cannot afford that Internet radio.  Or Netflix. Or those expensive cell phone plans.  Or wasteful grocery spending.  Or the dozen other things that people have pointed out.

You cannot afford that stuff even if you had NO debt.  Even if you cash out your 401k and pay off all debt, you can't afford it!  Cut your spending, stop making excuses, pay off the debt, and increase your savings!

Because you can't afford the life you are living.  You're set to work as a voluntary slave until you're 70+, and be miserable about money while you do it.

Stop it.
Title: Re: Should I cash out my 401k?
Post by: James on September 18, 2012, 07:27:14 PM
Atrocious?  Wow, really?  I think even you know that's hardly true.  Not hardcore?  Yeah.  But atrocious?


Yes, Atrocious, and abominable, alarming, appalling , deplorable, depressing, dire, distressing, dreadful, frightful, ghastly, harrowing, hideous, horrendous, horrible, horrific, shocking, unsightly... etc


That is our view based on your income and expenses.  You asked, we answered.
Title: Re: Should I cash out my 401k?
Post by: kkbmustang on September 18, 2012, 07:47:18 PM
Will someone less lazy than I go through and count the number of excuses SJ has made in this thread?  It's gotta be over twenty.  At this point I feel like you're just trolling us, that this is all made up to see how ridiculous you can be.

If it's true though SJ, I feel like today's MMM post was written for you:
www.mrmoneymustache.com/2012/09/18/is-it-convenient-would-i-enjoy-it-wrong-question/

Specifically:
Quote
If you still need to work for money, or at the very least, if you’re not saving at least 50% of your take-home pay, you can not afford it. Where “it” is anything.

You not only aren't saving 50%... You aren't saving anything, you're spending everything! And worse, you're doing it with massive debt!  Bad, terrible, high interest debt!

You cannot afford that Internet radio.  Or Netflix. Or those expensive cell phone plans.  Or wasteful grocery spending.  Or the dozen other things that people have pointed out.

You cannot afford that stuff even if you had NO debt.  Even if you cash out your 401k and pay off all debt, you can't afford it!  Cut your spending, stop making excuses, pay off the debt, and increase your savings!

Because you can't afford the life you are living.  You're set to work as a voluntary slave until you're 70+, and be miserable about money while you do it.

Stop it.

I counted 23ish.
Title: Re: Should I cash out my 401k?
Post by: Lars on September 18, 2012, 09:39:57 PM
Will someone less lazy than I go through and count the number of excuses SJ has made in this thread?  It's gotta be over twenty.  At this point I feel like you're just trolling us, that this is all made up to see how ridiculous you can be.

If it's true though SJ, I feel like today's MMM post was written for you:
www.mrmoneymustache.com/2012/09/18/is-it-convenient-would-i-enjoy-it-wrong-question/

I counted 23ish.

Sadly, I don't think he is trolling us. My wife and I provide financial mentoring to someone right now who must be SJs twin judging by the way they make up excuses. I wish I could distill down his plan or SJ plan into something short and sensible but all than comes into my mind is the plan of the underpants gnome. Fundamentally, their current plan doesn't have a long term chance of success but I dispair of convincing him as I imagine some of you here do. I wish could make this point really sink in:

YOU CAN STILL CHANGE. IF YOU WANT TO REACH YOUR GOAL AND YOUR CURRENT PLAN ISN"T WORKING, MAKE A NEW PLAN AND MAKE CHANGES. Sure what your doing is nice but if it was a great idea you wouldn't be in the situation in the first place and you wouldn't need to change. We have all done stupid crap but the time for that is over.
Title: Re: Should I cash out my 401k?
Post by: tannybrown on September 18, 2012, 10:44:35 PM
I vote to cash out the 401k.  You're not ready to make changes, so cashing out the 401k and removing this last safety net will accelerate your life to the "ready" state. 

Good luck!
Title: Re: Should I cash out my 401k?
Post by: SJ on September 19, 2012, 05:36:33 AM
I think we've beaten this one true and dead.  Yes, I'm a clown, a dolt, an atrocious spender, a troll, an underpants gnome, and a non-mustachian who is bound for financial disaster and working well into his 90's just to put food on the table.  I'll be sure to come back and post in this thread when my financial life has completely blown up in my face (oh, and I'll also post an update if by some miracle I manage to survive and make this work somehow).  I'm sure we'll all get a good chuckle either way. 

Thanks again to everyone who offered advice, thoughts, insight, and well-deserved face punching. 
Title: Re: Should I cash out my 401k?
Post by: SJ on September 19, 2012, 06:25:27 AM
One thing I wanted to throw in here is that IF we decide to raid the 401k and pay off this debt, that will put us in a better position to refinance our mortgage on maybe a 15 year at a new low interest rate of maybe 2.75% (currently at 3.75%).  Doing that will save us many thousands in interest and will completely negate the small penalty we'll pay on the 401k distro (and lost investment gains).  This refi wouldn't be possible with our current debt load and would take years to pull off if we don't take the distro and pay off the debt (and by then, interest rates might have gone back up).
Title: Re: Should I cash out my 401k?
Post by: Another Reader on September 19, 2012, 06:37:13 AM
You previously stated you have only owned the house for a year and have very little equity.  How would you be able to refinance at today's favorable rates without equity?

It sounds like you want to get past the debt before you make any long term plans.  To me, this is backwards.  In your shoes, I would plan either to increase my income or to live long-term on a reduced and not entirely predictable income.  Once I knew what my longer term plan was, then I would decide what to do about the debt.
Title: Re: Should I cash out my 401k?
Post by: arebelspy on September 19, 2012, 06:41:44 AM
The Fed stated a week ago with QE3 they intend to keep rates low through 2015.  I do not doubt them, based on the past 3 years behavior.

So that gives you some time to kick it into Mustachian mode, pay off the debt, and still refi, if you want (though 3.75% is a great rate).

Though I don't know why you say 15 year.  That seems like a terrible idea, given your situation.  30 year provides a much lower payment, and you can always prepay and turn it into a 15-year loan (or less).

Despite the comments here, we do wish you well, believe it or not.  Whether you cash in the 401k or not, I wish you the best in getting control of your spending and debt, and starting on a new path to Mustachianism.
Title: Re: Should I cash out my 401k?
Post by: SJ on September 19, 2012, 06:43:01 AM
You previously stated you have only owned the house for a year and have very little equity.  How would you be able to refinance at today's favorable rates without equity?

There is probably $10k in equity right now.  But I was thinking more along the lines of a "loan restructuring" than a refi...though admittedly I don't know much about how that works.  That said, do refi's require a lot of equity?  In our case, it will be a VA loan, if that makes a big difference in your answer.
Title: Re: Should I cash out my 401k?
Post by: SJ on September 19, 2012, 06:47:32 AM
The Fed stated a week ago with QE3 they intend to keep rates low through 2015.  I do not doubt them, based on the past 3 years behavior.

So that gives you some time to kick it into Mustachian mode, pay off the debt, and still refi, if you want (though 3.75% is a great rate).

Though I don't know why you say 15 year.  That seems like a terrible idea, given your situation.  30 year provides a much lower payment, and you can always prepay and turn it into a 15-year loan (or less).

It was my understanding that actually doing a 15 year would allow me to negotiate a lower rate than a 30 year does...am I mistaken?  And yes, given my current situation it would be a terrible idea, but once the debt is gone it would be much more doable.  But yes, I could just repay early and keep the lower payment...my thought was negotiating a lower rate, but if I can do that without going 15 then that's indeed what I would do.
Title: Re: Should I cash out my 401k?
Post by: arebelspy on September 19, 2012, 06:48:24 AM
You previously stated you have only owned the house for a year and have very little equity.  How would you be able to refinance at today's favorable rates without equity?

There is probably $10k in equity right now.  But I was thinking more along the lines of a "loan restructuring" than a refi...though admittedly I don't know much about how that works.  That said, do refi's require a lot of equity?  In our case, it will be a VA loan, if that makes a big difference in your answer.

10k on a 250k house is 4% equity (aka 96% LTV).  I don't think a refi (or restructure) will be possible, even if you had no debt besides the mortgage.

The 3.75% rate you have is pretty darn good, I wouldn't be unhappy with that at all.
Title: Re: Should I cash out my 401k?
Post by: arebelspy on September 19, 2012, 06:50:32 AM
The Fed stated a week ago with QE3 they intend to keep rates low through 2015.  I do not doubt them, based on the past 3 years behavior.

So that gives you some time to kick it into Mustachian mode, pay off the debt, and still refi, if you want (though 3.75% is a great rate).

Though I don't know why you say 15 year.  That seems like a terrible idea, given your situation.  30 year provides a much lower payment, and you can always prepay and turn it into a 15-year loan (or less).

It was my understanding that actually doing a 15 year would allow me to negotiate a lower rate than a 30 year does...am I mistaken?  And yes, given my current situation it would be a terrible idea, but once the debt is gone it would be much more doable.  But yes, I could just repay early and keep the lower payment...my thought was negotiating a lower rate, but if I can do that without going 15 then that's indeed what I would do.

Yes, 15 year tends to have slightly lower rates.  Not worth the loss of flexibility, especially when you get into a situation like you're in.

Additionally, the rates are so low it's probably worth NOT prepaying.. Letting the loan last 30 years and investing all extra money.  Mortgage is basically free money right now after inflation and interest deduction.  I'd take out 40 or 50 year loans right now if I could.
Title: Re: Should I cash out my 401k?
Post by: SJ on September 19, 2012, 06:55:02 AM
You previously stated you have only owned the house for a year and have very little equity.  How would you be able to refinance at today's favorable rates without equity?

There is probably $10k in equity right now.  But I was thinking more along the lines of a "loan restructuring" than a refi...though admittedly I don't know much about how that works.  That said, do refi's require a lot of equity?  In our case, it will be a VA loan, if that makes a big difference in your answer.

10k on a 250k house is 4% equity (aka 96% LTV).  I don't think a refi (or restructure) will be possible, even if you had no debt besides the mortgage.

The 3.75% rate you have is pretty darn good, I wouldn't be unhappy with that at all.

Our rate right now is great, indeed!  But 1% less would be stellar on such a large loan.  Do you know what the LTV has to be for a refi/restructure on an VA loan?
Title: Re: Should I cash out my 401k?
Post by: SJ on September 19, 2012, 06:56:47 AM
The Fed stated a week ago with QE3 they intend to keep rates low through 2015.  I do not doubt them, based on the past 3 years behavior.

So that gives you some time to kick it into Mustachian mode, pay off the debt, and still refi, if you want (though 3.75% is a great rate).

Though I don't know why you say 15 year.  That seems like a terrible idea, given your situation.  30 year provides a much lower payment, and you can always prepay and turn it into a 15-year loan (or less).

It was my understanding that actually doing a 15 year would allow me to negotiate a lower rate than a 30 year does...am I mistaken?  And yes, given my current situation it would be a terrible idea, but once the debt is gone it would be much more doable.  But yes, I could just repay early and keep the lower payment...my thought was negotiating a lower rate, but if I can do that without going 15 then that's indeed what I would do.

Yes, 15 year tends to have slightly lower rates.  Not worth the loss of flexibility, especially when you get into a situation like you're in.

Additionally, the rates are so low it's probably worth NOT prepaying.. Letting the loan last 30 years and investing all extra money.  Mortgage is basically free money right now after inflation and interest deduction.  I'd take out 40 or 50 year loans right now if I could.

Yeah, I've thought about that too...I just like the idea of having a paid off home..talk about peace of mind.
Title: Re: Should I cash out my 401k?
Post by: WaxOnWaxOff on September 19, 2012, 07:05:19 AM
I don't know what the requirements are specifically for a VA loan, but I recently refinanced and the bank required at least 20% equity. If you don't have a chunk of equity, a stellar credit rating, and a favorable debt-to-income ratio, you don't have much negotiating room.
Title: Re: Should I cash out my 401k?
Post by: SJ on September 19, 2012, 07:18:28 AM
I don't know what the requirements are specifically for a VA loan, but I recently refinanced and the bank required at least 20% equity. If you don't have a chunk of equity, a stellar credit rating, and a favorable debt-to-income ratio, you don't have much negotiating room.

Well, we will (if we take the distro) have all of the above except for the equity.  So I guess we'll focus on paying it down until we have some decent equity, which will also save us a lot of interest in the long run.  No rush I guess though, since we don't have PMI that we need to get rid of.
Title: Re: Should I cash out my 401k?
Post by: jp on September 19, 2012, 08:50:34 AM
(http://chzgifs.files.wordpress.com/2010/07/leaveamark_sg.gif#face%20punch%20gif)


(http://i41.photobucket.com/albums/e281/Weevlitz/face-punch.gif)
Title: Re: Should I cash out my 401k?
Post by: SJ on September 19, 2012, 09:05:52 AM
Found this on the Wikipedia article for VA loans:  "In a refinance where the loan is a VA loan refinancing to VA loan (IRRRL Refinance), the veteran may borrow up to 100.5% of the total loan amount."  So it looks like LTV isn't an issue if doing a refi ends up making sense.
Title: Re: Should I cash out my 401k?
Post by: Another Reader on September 19, 2012, 09:18:03 AM
Since the loan is VA, you may be able to qualify under this program.  However, the reduced income will probably lock you out because of debt to income ratio requirements.

http://www.benefits.va.gov/homeloans/irrrl.asp

Check with the folks that did your original loan to see what you would have to do to qualify.  Perhaps knocking out the other debt would get your debt to income ratio down to the point you would qualify.  I'm not sure you will get enough of an interest rate reduction to make the refinance worthwhile, but it's worth investigating.  If you can qualify, then shop the rate and terms.  For example, PenFed is offering 3.25 percent for a standard VA refi.

https://www.penfed.org/mortgage-rates-all/

Click on VA fixed.

Title: Re: Should I cash out my 401k?
Post by: SJ on September 19, 2012, 09:24:44 AM
Since the loan is VA, you may be able to qualify under this program.  However, the reduced income will probably lock you out because of debt to income ratio requirements.

http://www.benefits.va.gov/homeloans/irrrl.asp

Check with the folks that did your original loan to see what you would have to do to qualify.  Perhaps knocking out the other debt would get your debt to income ratio down to the point you would qualify.  I'm not sure you will get enough of an interest rate reduction to make the refinance worthwhile, but it's worth investigating.  If you can qualify, then shop the rate and terms.  For example, PenFed is offering 3.25 percent for a standard VA refi.

https://www.penfed.org/mortgage-rates-all/

Click on VA fixed.

Thanks for the links.  I found this bit of good news within:  "The occupancy requirement for an IRRRL is different from other VA loans.  When you originally got your VA loan, you certified that you occupied or intended to occupy the home.  For an IRRRL you need only certify that you previously occupied it."  That'd be great if we ever decided to turn it into a rental property.
Title: Re: Should I cash out my 401k?
Post by: grantmeaname on October 09, 2012, 04:19:53 PM
I'm sad this thread died out without much of a revolution, but I know I've seen SJ around recently.

SJ, what did you end up doing? Regardless of which path you ended up with, are you interested in trimming some fat out of your budget?


There's two pages. It all makes sense now. *tableface*
Title: Re: Should I cash out my 401k?
Post by: grantmeaname on October 09, 2012, 04:34:24 PM
And now that I'm at the actual end, do you have any updates for everyone, SJ?
Title: Re: Should I cash out my 401k?
Post by: SJ on October 10, 2012, 06:42:18 AM
I do have an update, thanks for asking.  Update:

Total debt: $252k on a 30 year VA mortgage loan @ 3.75%

Boy does it feel good to type that!!  Worth the small penalty we took!

Next step is to refi the mortgage and get it down to 3.25% if we can.

And yes, we are trying to cut expenses, particularly our grocery expenses but we are also looking at other areas.  Our savings will now go from about $200/month up to about $1k/month, presuming no major disasters from month to month of course.  We're keeping the credit cards with a $0 balance as our severe emergency fund and they will only be used in a dire case (though we may use our rewards card to pay for monthly expenses, and pay it off entirely each month).
Title: Re: Should I cash out my 401k?
Post by: Jack on October 10, 2012, 09:00:23 AM
Have you re-evaluated your spending yet?

I found your cellphone bill ($130/month plus an unspecified amount of reimbursed expenses for two phones) to be particularly absurd. Even if you want to keep the smartphone and data plan(s) -- and I don't blame you if you do -- you can do a lot better.

For example, I pay $40/month for 1200 voice minutes, unlimited text and unlimited data on Virgin Mobile (a MVNO that uses the Sprint network). I'm grandfathered in, but not by much: it might be $45/month if you started the same plan today. Similar deals are available from most MVNOs (aka prepaid companies), so you can pick a different one if you want to be on a different network.

In other words, you have absolutely no excuse to be paying more than $90/month (minus whatever gets reimbursed) for cell phones for you and your wife, in my opinion.
Title: Re: Should I cash out my 401k?
Post by: SJ on October 10, 2012, 09:40:14 AM
Yes, we're reevaluating everything.  The cell phone amount is actually AFTER the $60 reimbursement...so it's far worse than you thought!  Some of that is for the microcell we have, which gives us 5 bars of coverage in our house plus unlimited calling from home (we had to get it because cell phone coverage is sooooo bad out here that we'd be hard pressed to even make a single call without it).  I think that adds $25 a month or so, but cheaper than a landline.

But yes, I know we can do better.  So we'll be looking into it.  We're under contract, so I'm not sure when we can change carriers, but we'll see.
Title: Re: Should I cash out my 401k?
Post by: LadyM on October 10, 2012, 10:50:59 AM
I do have an update, thanks for asking.  Update:

Total debt: $252k on a 30 year VA mortgage loan @ 3.75%

Next step is to refi the mortgage and get it down to 3.25% if we can.


Check this out to see if it's even WORTH the time and closing costs to lower your mortgage by only 0.5%

http://zwicke.nber.org/refinance/ (http://zwicke.nber.org/refinance/)

I found this extremely helpful when we refi'd to 2% less than what we were paying AND from an interest-only 30 year, to a plain vanilla 30-year mortgage.  THAT was worth it.  Just don't forget to factor in those closing costs....and heck do you even have them available?

It might not be worth it at this point....given how long you plan to stay in the house, how much principle you have left to pay, what the closing costs are, yadda, yadda.  It might be worth your while to wait a few years. 

Another thing to keep in mind, as we were almost sunk by this....  AFTER closing costs, in order to close the loan we needed to have available in cash (combined savings, checking, 401K...but you don't have that anymore) 2x your monthly mortgage payment.  The underwriters wouldn't sign off on us unless we had that, even though our new payment would be $100 a month less than our current payment at the time.  If you have a VA loan, their terms might be different.

Food for thought is all.
Title: Re: Should I cash out my 401k?
Post by: LadyM on October 10, 2012, 11:09:20 AM
Yes, we're reevaluating everything.  The cell phone amount is actually AFTER the $60 reimbursement...so it's far worse than you thought!  Some of that is for the microcell we have, which gives us 5 bars of coverage in our house plus unlimited calling from home (we had to get it because cell phone coverage is sooooo bad out here that we'd be hard pressed to even make a single call without it).  I think that adds $25 a month or so, but cheaper than a landline.

But yes, I know we can do better.  So we'll be looking into it.  We're under contract, so I'm not sure when we can change carriers, but we'll see.

Sorry, I just started catching up...

DEFINITELY WORK ON THIS!!!  Start here:  http://www.mrmoneymustache.com/forum/share-your-badassity/communications-tech-isps-voip-cell/ (http://www.mrmoneymustache.com/forum/share-your-badassity/communications-tech-isps-voip-cell/)

And WTF is a "microcell"???  If you don't have home phone, but have shitty cell coverage at home, AND you have HIGH SPEED INTERNET - WHY NOT GO VOIP FOR THE HOME PHONE?!!?  Microcell might be cheaper than an honest-to-got POTS landline, but it's not cheaper than VOIP options.

Buy a NetTalk DUO and pay $2.50/month ($30/year) for home phone?!?  ($50 for the first year because it includes buying the device, so that's $4.16/month...but after that $30/year)  BOOM! - you have home phone AND you can drop the microcell, whatever that is.  BOOM! - You can buy the NetTalk device for less than 1 month's cost of Microcell and I just saved you $22.50/month!!  Add that to your stash and thank me later.

Call your cell provider and find out what it costs to get out of your contract....it might be worth it.  For us, we were already out of a contract: Our family plan with AT&T was at the cheapest (WITH the schoolteacher discount) was $81 a month for 2 phones with unlimited talk and text.  We switched to pre-paid with AT&T and got it down to $25/month for each phone (my husband and I) for 250 mins talk, unlimited text.

RECENTLY we switched to Airvoice Wireless (an AT&T MVNO) and now pay $10/month for each phone....for 250 minutes of talk OR 500 texts, or any combo of those two ($.04/min talk, $.02/text).  You can trim your cell bill too.

DO IT.  DO IT NOW!!!



Title: Re: Should I cash out my 401k?
Post by: Jack on October 10, 2012, 11:54:28 AM

And WTF is a "microcell"???  If you don't have home phone, but have shitty cell coverage at home, AND you have HIGH SPEED INTERNET - WHY NOT GO VOIP FOR THE HOME PHONE?!!?  Microcell might be cheaper than an honest-to-got POTS landline, but it's not cheaper than VOIP options.

Buy a NetTalk DUO and pay $2.50/month ($30/year) for home phone?!?  ($50 for the first year because it includes buying the device, so that's $4.16/month...but after that $30/year)  BOOM! - you have home phone AND you can drop the microcell, whatever that is.  BOOM! - You can buy the NetTalk device for less than 1 month's cost of Microcell and I just saved you $22.50/month!!  Add that to your stash and thank me later.


You can do even better than that: sign up for Google Voice and get an ObiTalk device (for $40 or so, I think) and pay zero per month for VoIP.


RECENTLY we switched to Airvoice Wireless (an AT&T MVNO) and now pay $10/month for each phone....for 250 minutes of talk OR 500 texts, or any combo of those two ($.04/min talk, $.02/text).  You can trim your cell bill too.

DO IT.  DO IT NOW!!!

That's a better suggestion than mine, unless one insists on keeping their wussypants smartphone data. (For what it's worth, my $40/month gets subsidized by my employer, so there's no advantage to me for reducing it further.)
Title: Re: Should I cash out my 401k?
Post by: SpendyMcSpend on October 10, 2012, 05:06:35 PM
You are looking at *very* short-term solutions that will do nothing for your long-term fiscal health.  What happens when the 401k money runs out??  You say that you two are planning to stay in your current jobs, so your income amount will not change.  You say that you are at bare minimum on expenses (which is not true), so that won't change either.  So basically, once the 401k money runs out you will be in EXACTLY the same position you are in now, only without retirement savings.  NOT A GOOD PLAN.
Title: Re: Should I cash out my 401k?
Post by: SpendyMcSpend on October 10, 2012, 05:13:38 PM

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).

Because cashing out your 401k does not change your unfrugal behavior.
Title: Re: Should I cash out my 401k?
Post by: arebelspy on October 10, 2012, 06:12:53 PM

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).

Because cashing out your 401k does not change your unfrugal behavior.

Too late.  Looks like SJ took the easy way out, paid the penalties and cashed it in.

Hopefully he/she sticks around and learns some frugal behavior so he/she doesn't fall into the same trap.
Title: Re: Should I cash out my 401k?
Post by: SJ on October 10, 2012, 07:36:02 PM

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).

Because cashing out your 401k does not change your unfrugal behavior.

Too late.  Looks like SJ took the easy way out, paid the penalties and cashed it in.

Hopefully he/she sticks around and learns some frugal behavior so he/she doesn't fall into the same trap.

I read the MM blog in its entirety once, as well as all of the comments.  Then I read it again with my wife (no comments this time).  So yeah, I know a fair amount about being mustachian.  This move, for many reasons, was the right one for our situation.  Sure, not totally superbadassmustachian, but it was what we needed at this time and WELL worth the small penalty we paid (about $2k, which we'll make up in interest saved from all the high interest debt we paid off).
Title: Re: Should I cash out my 401k?
Post by: SJ on October 10, 2012, 07:38:13 PM
You are looking at *very* short-term solutions that will do nothing for your long-term fiscal health.  What happens when the 401k money runs out??  You say that you two are planning to stay in your current jobs, so your income amount will not change.  You say that you are at bare minimum on expenses (which is not true), so that won't change either.  So basically, once the 401k money runs out you will be in EXACTLY the same position you are in now, only without retirement savings.  NOT A GOOD PLAN.

Umm...no, see we'll be in an entirely different situation because we'll have 1) paid off ALL of our high interest consumer debt (all that's remaining is our mortgage) and 2) will have refinanced our mortgage for additional savings, and 3) will now be able to sock $1k/month away, which is about 5x's what we were able to do before.
Title: Re: Should I cash out my 401k?
Post by: arebelspy on October 10, 2012, 07:56:19 PM
Cool.

In the grand scheme of things, 2k isn't much at all.  I think it was a mistake, but I've blown many multiples of that on bad decisions, so I'm not one to judge.

Best of luck to you.
Title: Re: Should I cash out my 401k?
Post by: nealashley on October 12, 2012, 09:01:18 PM
SJ,

As a CPA, I've seen this scenario play out a lot with various clients. I can tell you the one thing they all seem to be surprised about, even after my telling them and advising against it, is the tax liability following the withdrawal year.

The distribution, of course, will incur a 10% penalty and the entire amount will be added to your taxable income in that year as well. Based on your income, it looks like the distribution will be taxed at a marginal tax rate of 25% for Federal and probably 5-7% for State (depending on where you live) for a total of 40-42% of the amount going to taxes. If you can get stay under the  25% bracket, you will be looking at a total of 30-32% (in the 15% bracket). So, please keep this in the back of your head as I've seen it come back and catch people way off guard.

This post is to make you aware so you can plan accordingly.

To a kick A$$ future,

Neal
Title: Re: Should I cash out my 401k?
Post by: lhamo on October 13, 2012, 05:22:25 AM
SJ,

One suggestion that no one seems to have mentioned yet, so I'll throw it out there.  Several airlines have affiliated credit cards that have large miles bonus offers for opening the card.  I regularly get offers from both United and Delta for cards that have the fees waived for the first year, plust anywhere from 20-50k in mileage bonuses.  Depending on the ages of your kids (some mileage programs may not allow kids to travel unaccompanied, but a 12 year old is sometimes considered an "adult" who can be the companion for a younger child), you might be able to greatly reduce your expenses for your kids visits by getting one of these cards and using the bonus miles to book one or maybe both of the tickets.  Since you probably know the school calendar well in advance, you could book these well in advance to ensure you have seats. 

If you are committed to working from a budget and not living beyond your means, you could also use one of these cards for as many of your regular expenses as possible (gas, groceries, food, phones, utilities, etc) in order to accumulate additional miles that could be used toward the kids tickets.  Obviously very important that you track your spending and ensure that you pay off the bill in full every month.  But if you are disciplined and careful then this is another way to use your spending in one area to bring down spending in another over time.

Regarding your livestock business, if you don't already you should determine some baselines for how much you are going to invest and when you will cut your losses if you fail to make it profitable. 

Being in a rural area makes it difficult, but since picking up a regular second job is not feasible given your work situation you might also think about other possible part-time sidelines that might help bring in extra income that are more flexible, so that if/when you don't have paid work for your client you have something else to do that can at least bring in a little extra.  garage sale/thrift store combing for items that you can become an expert in appraising and then sell on ebay or craigslist might be an option -- I'm thinking things like farm equipment, furniture, antiques, out of print books, etc.  Difficult in a rural area, but might be a useful niche to explore.

Finally, assume you have already looked at whether or not there are generic versions of your meds that would be cheaper, but if not definitely do that.  And do some research about when the patents for your meds will run out, if there are currently no generics.  It would be wise to switch to the generic as soon as possible after it becomes available, as it appears your meds are very expensive.  If they are related to any chronic condition that can be addressed by changes in diet and exercise (e.g. high blood pressure, cholesteral, diabetes (maybe not severe cases, but if early you might be able to turn things around)), then some time spent on researching effects of diet on such conditions and doing some experimentation with changing yours might be well spent, and might also help to bring the grocery bill down. 

Personally I would not have cashed in the 401k -- I think you will find at tax time that the hit is much larger than you anticipated.  I hope you are saving up for your taxes in the event that happens.  But glad you feel good about your choice and are moving forward.  Hope you keep coming back here in spite of the tough love you got.  MMM and the crew really only want you to turn this around so that you can live a life not ruled by debt.
Title: Re: Should I cash out my 401k?
Post by: SJ on October 13, 2012, 06:56:01 AM
SJ,

As a CPA, I've seen this scenario play out a lot with various clients. I can tell you the one thing they all seem to be surprised about, even after my telling them and advising against it, is the tax liability following the withdrawal year.

The distribution, of course, will incur a 10% penalty and the entire amount will be added to your taxable income in that year as well. Based on your income, it looks like the distribution will be taxed at a marginal tax rate of 25% for Federal and probably 5-7% for State (depending on where you live) for a total of 40-42% of the amount going to taxes. If you can get stay under the  25% bracket, you will be looking at a total of 30-32% (in the 15% bracket). So, please keep this in the back of your head as I've seen it come back and catch people way off guard.

This post is to make you aware so you can plan accordingly.

To a kick A$$ future,

Neal

Thanks Neal.  All of this has been considered.  One reason I chose to do it now is because we're in the 15% tax bracket, thanks to my income being non-taxable on either state or federal levels.  I had them withhold a total of 25% to cover both the penalty and the federal tax liability.  I expect to get much of that back though because I am in independent contractor with attendant deductions, and we also run a livestock business with its own deductions.  So this year, we should basically be getting almost all federal taxes paid back as a refund.
Title: Re: Should I cash out my 401k?
Post by: SJ on October 13, 2012, 07:05:33 AM
SJ,

One suggestion that no one seems to have mentioned yet, so I'll throw it out there.  Several airlines have affiliated credit cards that have large miles bonus offers for opening the card.  I regularly get offers from both United and Delta for cards that have the fees waived for the first year, plust anywhere from 20-50k in mileage bonuses.  Depending on the ages of your kids (some mileage programs may not allow kids to travel unaccompanied, but a 12 year old is sometimes considered an "adult" who can be the companion for a younger child), you might be able to greatly reduce your expenses for your kids visits by getting one of these cards and using the bonus miles to book one or maybe both of the tickets.  Since you probably know the school calendar well in advance, you could book these well in advance to ensure you have seats.

If you are committed to working from a budget and not living beyond your means, you could also use one of these cards for as many of your regular expenses as possible (gas, groceries, food, phones, utilities, etc) in order to accumulate additional miles that could be used toward the kids tickets.  Obviously very important that you track your spending and ensure that you pay off the bill in full every month.  But if you are disciplined and careful then this is another way to use your spending in one area to bring down spending in another over time.

We currently have a rewards card and airline tickets are one of the rewards we can exchange for.  This card currently gives us double the points for the first year, which ends in a month, so we'll be shopping around to see if there are better points cards to go with.

Regarding your livestock business, if you don't already you should determine some baselines for how much you are going to invest and when you will cut your losses if you fail to make it profitable. 

Already done this.  We're not investing any further beyond feed, care some shows, etc. until we start turning a profit (i.e no further animal purchases...we'll work from our own breedings for the near future).

Being in a rural area makes it difficult, but since picking up a regular second job is not feasible given your work situation you might also think about other possible part-time sidelines that might help bring in extra income that are more flexible, so that if/when you don't have paid work for your client you have something else to do that can at least bring in a little extra.  garage sale/thrift store combing for items that you can become an expert in appraising and then sell on ebay or craigslist might be an option -- I'm thinking things like farm equipment, furniture, antiques, out of print books, etc.  Difficult in a rural area, but might be a useful niche to explore.

Yes, we're working on coming up with workable means of additional income.  Reselling on eBay/Craigslist are ideas I'm researching to see if I can find us a profitable niche.

Finally, assume you have already looked at whether or not there are generic versions of your meds that would be cheaper, but if not definitely do that.  And do some research about when the patents for your meds will run out, if there are currently no generics.  It would be wise to switch to the generic as soon as possible after it becomes available, as it appears your meds are very expensive.  If they are related to any chronic condition that can be addressed by changes in diet and exercise (e.g. high blood pressure, cholesteral, diabetes (maybe not severe cases, but if early you might be able to turn things around)), then some time spent on researching effects of diet on such conditions and doing some experimentation with changing yours might be well spent, and might also help to bring the grocery bill down.

My meds are currently generic and the cheapest options I can find, though I'm always looking out for possible ways to reduce this expense.  Some lifestyle changes have been made which help, but unfortunately this condition is not caused by diet, lack of exercise, etc. and not much can be done to improve the situation beyond medicine management.

Personally I would not have cashed in the 401k -- I think you will find at tax time that the hit is much larger than you anticipated.  I hope you are saving up for your taxes in the event that happens.  But glad you feel good about your choice and are moving forward.  Hope you keep coming back here in spite of the tough love you got.  MMM and the crew really only want you to turn this around so that you can live a life not ruled by debt.

Thanks for your kind words!  I haven't taken any of this personally, I knew what I was asking would get me some face punches, some of which are well deserved. 
Title: Re: Should I cash out my 401k?
Post by: arebelspy on October 13, 2012, 07:19:29 AM
I haven't taken any of this personally, I knew what I was asking would get me some face punches, some of which are well deserved.

I appreciate your attitude.  Most people would have left when not hearing what they wanted.

I'm glad you're making changes and moving forward, and I'm glad you're sticking around here as well.  Keep us updated on your progress.
Title: Re: Should I cash out my 401k?
Post by: SJ on October 13, 2012, 11:19:52 AM
I haven't taken any of this personally, I knew what I was asking would get me some face punches, some of which are well deserved.

I appreciate your attitude.  Most people would have left when not hearing what they wanted.

I'm glad you're making changes and moving forward, and I'm glad you're sticking around here as well.  Keep us updated on your progress.

And I appreciate yours as well!  I'll for sure be sticking around.
Title: Re: Should I cash out my 401k?
Post by: warped on October 15, 2012, 04:51:00 PM
I'm coming in way late, but thought I'd add my 0.02 worth.

I had a history of getting credit card debt, then consolidating at better interest rates.

This helped out short term, but my problem was that we just kept running up things.

Finally, my wife and I spent a lot of time talking, and got on the same page.

We meet every month, go over the budget and the debt payoff (I print it up and do the work, because I like that stuff!)

After we got on the same page, I got a bunch of 0% balance transfer cards and did another round of consolidation.

This time, with a weekly cash budget and being on the same page, it's working out great!!

Point is, yeah, you took a shortcut to some degree, but it helped out, and if you use the lesson to keep going in the right direction, I think you'll be fine.

Random tip of the day: you can buy a 25 lb bag of rice for like $10. Do you have any idea how much rice that is????

Beans are also shockingly cheap in bulk. ;)
Title: Re: Should I cash out my 401k?
Post by: SpendyMcSpend on October 15, 2012, 06:00:10 PM
I think the tax liability will be more like 30-35% (future CPA here) when you include the state taxes.
Title: Re: Should I cash out my 401k?
Post by: offroad on October 16, 2012, 01:57:57 AM
Put it this way:

Would you think about going bankrupt first? Or cashing out 401k which is protected from bankruptcy?

All the debts go away for ten years. More money saved for FI. Just saying.
Title: Re: Should I cash out my 401k?
Post by: grantmeaname on October 16, 2012, 06:45:26 AM
We're kinda beating a dead horse now that SJ has cashed it out and made his decision. Maybe we could move on?
Title: Re: Should I cash out my 401k?
Post by: offroad on October 16, 2012, 06:48:18 AM
wow.  that was a fast cash out. one month later.   roll on.
Title: Re: Should I cash out my 401k?
Post by: SJ on October 16, 2012, 06:53:10 AM
I think the tax liability will be more like 30-35% (future CPA here) when you include the state taxes.

State taxes are like 6% or so, if I recall correctly.  So total liability would be about 30%, of which 25% is already covered.
Title: Re: Should I cash out my 401k?
Post by: SJ on October 16, 2012, 06:54:22 AM
Put it this way:

Would you think about going bankrupt first? Or cashing out 401k which is protected from bankruptcy?

All the debts go away for ten years. More money saved for FI. Just saying.

Wow, some of you really bow down to the 401k...lol.  No, I wouldn't consider bankruptcy when I can just cash it out and pay off all my debts.  Done deal, debts gone.
Title: Re: Should I cash out my 401k?
Post by: Jack on October 16, 2012, 07:00:23 AM
Wow, some of you really bow down to the 401k...lol.

That's because we understand the power of tax-advantaged compound interest.
Title: Re: Should I cash out my 401k?
Post by: SJ on October 16, 2012, 03:52:21 PM
Wow, some of you really bow down to the 401k...lol.

That's because we understand the power of tax-advantaged compound interest.

As do I...

But even so, tax-advantaged compound interest on $20k is hardly worth filing bankruptcy to keep.
Title: Re: Should I cash out my 401k?
Post by: grantmeaname on October 16, 2012, 04:17:33 PM
And interest on debt compounds just like interest on savings.