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Old 01-15-2014, 12:12 PM
 
1 posts, read 3,025 times
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I am 63 1/2 and just committed to retire and to collect a lump-sum buy out of my pension benefits. I intend to register for Social Security so as to collect immediately after my employment separation date. My spouse (66 1/20) is currently retired and receiving her fixed benefit pension and Social Security.

Our combined unsecured debt is not a problem, however....(please don't scold), we are saddled with a home equity line of credit with a balance of $85,000.00 and an 11% rate of interest. It is structured as a revolving line of credit with an $826.00 per month payment and approx. $795.00 in interest incurred each month.

Is it wise to pay this off as quickly as possible from my lump sum distribution (after it is rolled over into my IRA accounts)?

Thanks for any insight you may be able to provide...

Tom C.
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Old 01-15-2014, 12:20 PM
 
Location: Currently living in Reddit
5,655 posts, read 5,709,320 times
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I had a similar situation where we used inheritance money to retire business and credit card debt.

The financial advisors we spoke with suggested that yes, it is smarter to eliminate any debt where the interest is higher than what you can reasonably expect to earn via investing. We retired everything over 15% interest.

Just make sure when you're doing your math that you include any penalties for paying off the loan early. And if you rolled over the pension into an IRA, you may have other penalties to deal with (but maybe not since you're over 59).

That said, I wouldn't go by my experience or anyone else's who posts here. I'd talk to a professional financial advisor as your particulars may be different than others.
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Old 01-15-2014, 04:01 PM
 
12,709 posts, read 9,998,427 times
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Quote:
Originally Posted by TomTheCork View Post
I am 63 1/2 and just committed to retire and to collect a lump-sum buy out of my pension benefits. I intend to register for Social Security so as to collect immediately after my employment separation date. My spouse (66 1/20) is currently retired and receiving her fixed benefit pension and Social Security.

Our combined unsecured debt is not a problem, however....(please don't scold), we are saddled with a home equity line of credit with a balance of $85,000.00 and an 11% rate of interest. It is structured as a revolving line of credit with an $826.00 per month payment and approx. $795.00 in interest incurred each month.

Is it wise to pay this off as quickly as possible from my lump sum distribution (after it is rolled over into my IRA accounts)?

Thanks for any insight you may be able to provide...

Tom C.
Be careful about taxes. If you take too much from IRA in a year you still were working, it could be a nasty surprise IRS bill that would make you go into debt again on your heloc!

You should probably pull from IRA enough to pay off 1/3 of the heloc (and the remaining payments for that year) in the year you retire. Then in early January of the next year, you can pull out enough to pay off the remaining 2/3 without paying too much tax.
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Old 01-17-2014, 10:39 PM
 
280 posts, read 286,518 times
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We would need way more details to offer any reasonable advice, all decent financial advice is situational. Is the lump sum a traditional or Roth distribution? How much is the sum? How much more do you own on home? What are monthly payments? Just to list a few of the particulars we would need to consider.
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Old 01-17-2014, 10:44 PM
 
Location: In the Pearl of the Purchase, Ky
7,442 posts, read 12,969,560 times
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I had to use a partial lump sum of my retirement to pay off a very bad debt. My exwife! That took about $1000 out of my monthly retirement check. That hurt!
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Old 01-17-2014, 11:02 PM
 
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Look into the tax situation. I think there are special rules about pension distributions and people who retire early. You may mot need to roll the money into an IRA and there may be no penalties.
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Old 01-18-2014, 05:18 AM
 
Location: Southern California
4,431 posts, read 5,312,272 times
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At some point isn't your line for credit payment going to increase. At 11% have you you looked into refinancing it to bring down the interest rate?
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Old 01-18-2014, 05:48 AM
 
Location: Wartrace,TN
5,570 posts, read 8,920,106 times
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You will never be able to earn MORE than 11% on a safe investment.

I would be inclined to use the pension payout to retire the debt since it is costing you almost 800 dollars a month in interest. Since your income is (probably) going to be lower than it was while you were working it is time to get out of debt.
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Old 01-18-2014, 05:51 AM
 
Location: Jamestown, NY
7,841 posts, read 7,344,278 times
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Quote:
Originally Posted by thelopez2 View Post
At some point isn't your line for credit payment going to increase. At 11% have you you looked into refinancing it to bring down the interest rate?
This is what I would try first, and if at all doable, do it before I touched the lump sum. With decent credit, you should be able to refinance down to half or less of 11%. Draw from the lump sum to pay the closing costs, which will be much, much less than $85k.

If it wasn't a lump sum in lieu of a pension (like an inheritance), then paying it off from the distribution would make sense, but this is retirement money you're proposing to dip into, and you may need that money down the road. You can always sell the house if need be.
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Old 01-18-2014, 07:40 AM
 
20,793 posts, read 54,035,722 times
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You should be able to refinance that, cut the rate in 1/2 at least, then you can continue to put the extra toward principal and pay it off in a few years. I wouldn't take the lump sum to pay it off until you investigate other options. Knowing you have the funds there to pay it off should be sufficient. Call your bank or maybe some credit unions in your area and see what your options are.
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