When your budget is tight and your debt load seems insurmountable, it's easy to eye the money you have saved in your retirement account as a way out of a bad situation.
With inflation and consumer prices up, Americans increasingly are turning to credit cards. Credit card balances increased by $46 billion since the first quarter, according to the latest report on household debt by the Federal Reserve Bank of New York.
Year over year, there was a 13% increase in credit card balances since the second quarter of 2021, representing the largest jump in more than 20 years, the report said.
Other balances — which include retail cards and other consumer loans — increased by $25 billion.
The New York Fed researchers also found modest increases in delinquent payments for mortgages, auto loans and credit card debt as lenders end forbearance programs established at the start of the pandemic.
The data mirrors questions I've been receiving on my toll-free line. People are worried about paying off the debt they've been carrying for some time.
A Northern California caller wanted advice on how to get rid of $13,000 in credit card debt at 22 percent interest and another $7,000 in personal loans.
"I have a very good income of $121,000," she said. "I have a meager $30,000 in my federal retirement account. Should I take the money out of the federal retirement account, which has been losing money lately?"
After talking with the caller, who asked that her name not be disclosed, I laid out a plan for her.
Here's the background: She's 63 and just had the remaining balance of about $175,000 in student loans paid off through the federal Public Service Loan Forgiveness program. Before calling the toll-free line, she already had taken out a $10,000 loan from her Thrift Savings Plan (TSP), the federal government's version of a 401(k). Her goal was to use some of the money to help her adult daughter, who is going through some health challenges. She's spending about $500 extra each month on medical expenses for her daughter.
My assessment: She should stop taking money out of the TSP.
Here's when you should withdraw funds from your retirement account if you're not already retired: when there is no other choice. You've gone through all your nonretirement savings and exhausted other sources of assistance.
Then, as a last resort, you may have no choice but to tap your retirement account. But keep in mind that if you're younger than 59½, you could be subject to a 10% early-withdrawal penalty. And even if you are not dinged with the penalty, you have to pay income taxes on the money.
A retirement loan is slightly better than a withdrawal. In a down market in which your retirement portfolio is taking a beating, it might make sense to use the money to get rid of higher-interest debt.
Generally, you should try to avoid borrowing from your retirement account. During better times, you could be missing out on compound earnings had the money stayed in your account.
My advice: Because she already had borrowed from her TSP, I suggested she put aside about $3,000 for a cash cushion and use the rest of the money to pay off the two smaller loans, which would free up $300.
And yes, I know her credit card debt is more expensive. But when getting out of debt, attacking smaller debts and wiping them out often motivates people to become aggressive in paying down balances.
We briefly discussed whether she should apply for Social Security because she's older than 62. But if she plans to work for another few years, she shouldn't take Social Security until she at least hits her full retirement age of 66 years and eight months. If you're younger than full retirement age for the entire year, Social Security will deduct $1 from your benefit payments for every $2 you earn above the annual limit. For 2022, that limit is $19,560.
I suggested she look for cuts in her budget.
I asked if she could cut anything from her budget.
She didn't think so.
Her rent of $1,000 a month is reasonable given her income.
I asked her to pull her checking account statements for the past 12 months and, with a highlighter, go through them to find anything she could trim from her monthly budget. Here's what she found:
"So far, the biggest items are Costco and the natural foods store," she emailed. "Last month, I spent $683 on Costco's food and gas for just me. The month before, I spent $1,000. I had a house guest that month."
She can reduce the cost of mobile phone service, which is $190 a month for her and her daughter. "She needs to get her own service when she starts working. I can possibly get what I need for $75 a month. That's $115 saved there."
She identified another $150 in savings from cutting down her Costco and natural foods store trips per month.
There was another $40 if she canceled three streaming services. So it went, with us discussing other trims to find the money to pay down her debt.
"It was nice getting down to the nitty-gritty of my spending," she admitted.
I also encouraged her to call the credit card company and see what they could do to lower her interest rate or work with her on a payment plan that could speed up her debt reduction. She did that and is waiting for a response.
With another set of eyes, the caller could see she had options. If you think you may need help, take advantage of free financial coaching and counseling through America Saves (americasaves.org). Search for "Free Financial Coaching & Counseling." You can also get assistance from a nonprofit credit counseling agency by visiting the National Foundation for Credit Counseling or calling 800-388-2227.
If you start with the premise that you shouldn't touch that precious pot of money meant to carry you through your retirement years, you might find you have other options, too.
Singletary is personal finance columnist for the Washington Post. Her toll-free line is 1-855-ASK-POST.