Dear Rick:
I am 60 years old, divorced and have never taken an active interest in my finances. I’ve never worried about saving for retirement, because I felt that when I retired, I’d be able to sell my business and that along with the inheritance I would receive from my parents, I would be in good shape. Unfortunately, I now realize that was a mistake. I was recently told that my business has virtually no value and that I won’t be able to sell it. Also, I learned that my parents’ finances are not nearly as good as I thought. Unbeknownst to me, they have been financially supporting my sister and as a result, any inheritance I receive will be minor at best. I have started to get my finances in order and have started to seriously cut back on my expenses. In fact, I am thinking of selling my house and moving. Unfortunately, with my home equity loan and mortgage, I have very little, if any, equity in my house. Other than the home, the only real asset I have is a Roth IRA worth about $100,000, which I received during my divorce. My main issue for you is my charge card debt. When I added up all of my charge cards, I have over $80,000 in debt, and I’m paying anywhere between 18½ to 21½ percent interest. My question to you is what do you think is the best way to rid myself of my charge card debt? You should know I tried to transfer balances, but I was rejected.
Stan
Dear Stan:
In reviewing your situation, I agree that paying off your charge cards should be your major financial goal. After all, the interest you are paying is substantial, and as far as I’m concerned there is no investment that you can make that would give you a better rate of return. After all, when you pay down a 21½ percent interest rate charge card, you’re getting a 21½ percent return on your money, and I can assure you there’s no investment that would give you that return. In addition, keep in mind it’s an after-tax return, because the 21½ percent you pay is not tax deductible.
I see two options for you to pay off your charge card debt. The first is to increase your monthly payments. The fact that you are cutting back on your expenses means that you’re freeing up cash and that could be used to pay down the debt. Every dollar you pay above and beyond your minimum balance, reduces the balance on your principal. That being said, it probably will take you a fair number of years to pay down the debt in total. Another option is to use the money in your Roth IRA to pay off the charge card debt. Because you are 60, there are no tax implications for withdrawing money out of the Roth IRA to pay off the charge cards. Typically, I’m not a big fan of taking money out of retirement accounts, such as a Roth IRA, to pay off debt; however, in the situation at hand, where the interest rate is so high, this is a viable alternative.
In reviewing the two options, my advice would be to use the money from the Roth IRA to pay off your charge cards. If nothing more, getting rid of that debt will substantially improve your finances. However, I believe that there is something more you should commit yourself to do. My recommendation is that the money that you would have used to make your monthly payment on your charge card, along with the money that you are saving by becoming more efficient with your expenses, should be all invested for your retirement. Whether it’s in a 401(k), traditional IRA or Roth IRA, you need to make sure that the money you are saving is put away for your retirement. It is imperative that you have the discipline to invest that money as opposed to looking for ways to spend it.
One issue that I constantly deal with people about is potential inheritances. What I always tell clients is that they should never depend upon inheritances. After all, things happen and you don’t want to be in the position that you’ve depended upon an inheritance, and when you don’t receive it, it derails your retirement. In today’s world with people living longer and the cost of living increasing substantially, it becomes more of a gamble if someone is going to receive an inheritance or not. Of course, if your father was Bill Gates, I’m not sure you’d have to worry. However, for the great majority of us, we do have to be concerned and that is why I tell people don’t depend upon inheritances.
One last note, and that is a reminder that charge card debt has a way of strangling you, and that is why it’s so important to rid yourself of charge card debt wherever you can. Whether it’s making extra payments or using money from Roth IRAs, my general advice is to rid yourself of charge card debt as soon as you can.
Good luck!
Rick is a fee-only financial advisor. If you would like Rick to respond to your questions, please email Rick at rick@bloomassetmanagement.com