[Noozhawk's note: This column is part of a continuing series.]
Examining your finances takes fortitude. What are your goals and dreams? What can you afford? Here is another question I’ve heard in my financial advisory practice:
Dear Karen: Here’s the situation. My wife and I are in our early 40s. We make good money (a bit over $200,000) but have over $700,000 in debt; that’s including our mortgage and the kids’ braces. I have $75,000 in a 401(k), which I’m thinking of liquidating to pay down some of the credit card debt, which charges a high interest rate. We have no other savings. Do you think this is a good idea?
— Drowning in Debt
Dear Drowning: In a word, no. For one, at your age you would pay a penalty to remove the funds from your 401(k). There are certain reasons you can remove funds without penalty (such as education and medical emergency), but paying down credit card debt is not one of them.
Another reason to hold onto your retirement account is that if you should be forced into bankruptcy, retirement funds are off-limits from your creditors. You need to protect these funds for your retirement.
Rather than being the key to your short-term credit card woes, your 401(k) is the key to your recovery and long-term well-being.
And while you still have to take the first steps yourselves, recent changes in 401(k) features make saving from your paycheck less painful by “nudging” you in the right direction. Not only are new employees automatically enrolled (you have to opt out instead of opt in), but depending on the plan you may be automatically enrolled in a “target date” fund that invests appropriately (by someone’s measure) depending on your expected retirement year. Some even have a feature that allows you to increase your deduction automatically each year (to a maximum) so save a larger percentage of your paycheck as you approach retirement.
You don’t say what led to this predicament, but the first rule of financial planning is to live within your means. You absolutely need to take a hatchet (not a nail file) to each spending category. It is mandatory that you reduce your spending below your income, even if that means macaroni and cheese from here on out. Check out one of the free budget software programs online: I think Mint.com does a decent job. This site will help you understand budgeting and savings and help you get back on track.
You’re not alone in your predicament. Sixty percent of middle-class Americans say retirement saving is a distant second to paying their monthly bills. Your future selves are critically underfunded, so you’ll likely have to implement all three basic options: spend less, save more and retire later.
One positive step you can take is to bring your kids with you on this financial journey, in an age-appropriate way. A recent report called “A 360-Degree Approach to Preparing for Retirement” by Principal Financial Group and Create-research describes the necessity of financial literacy for today’s youth as well as adults.
“In the industrial age, it was hard to get by without basic literacy: the ability to read and write,” the report says. “In this age of personal responsibility, it is just as hard to get by without financial literacy: the ability to plan and prioritize.”
— Karen Telleen-Lawton’s column is a mélange of observations spanning sustainability from the environment to finance, economics and justice issues. She is a fee-only financial advisor (www.DecisivePath.com) and a freelance writer (www.CanyonVoices.com). Click here to read previous columns. The opinions expressed are her own.