Considering Taking A Loan Out Of Your 401(k)? Read This First.

By Gail MarksJarvis
Chicago Tribune.

Q: My wife stopped working and started staying home when we had our little ones. Now we have a lot of credit card debt we’d like to get rid of. Assuming I have a solid 401(k) balance for my age, is it wise to take a loan from my 401(k) to pay off the credit cards? I’m 40 and have $165,000 in my 401(k).
_ B.C.

A: You have saved a good amount for retirement, but without knowing your income, it’s not clear if it’s enough.
Financial planners tend to want people to have at least enough savings when they retire to provide annual income that’s 70 to 80 percent of their pay in the last year they were working.

When you are close to retiring, you can quickly look at whether you’ve saved enough by multiplying your salary by 12. If your savings match that, you are in the ballpark.

At age 40, you can test to see if you are on your way. By that age, you need to have built up 2.4 times your existing annual pay to get to the 80 percent threshold eventually. So if you are making $100,000, that would be a sum of $240,000 in the 401(k).

If your pay is $50,000 a year now, you would need to have accumulated $120,000. If you think you can get by on 70 percent of your last year of pay in retirement, then at 40 you’d need two times your current pay, or $100,000 if your income is $50,000.

Still, even if you are close to being on target with your saving, I am reluctant to suggest borrowing from your 401(k) to pay off credit card debt.

You are likely to save yourself some substantial interest charges if you do wipe out your card debt with a 401(k) loan. Paying about 4.5 percent interest to repay a 401(k) loan makes a lot more sense than paying 12 percent on credit cards. And when you pay interest on the 401(k) loan, the money goes back into your savings, not to a bank.

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