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Q&A: "I'm Recently Retired and Thinking About Cashing in a Portion of my Retirement Savings to Pay Off Credit Card Debt. Is this a Good Idea?"

Retirement Accounts Social Security Tax

Question and background: 

I'm recently retired and thinking about cashing in a portion of my retirement savings to pay off credit card debt. Is this a good idea? I am 63 and was laid off last year. I decided to take early retirement instead of finding another job. I have accrued approx. $304,000 for retirement made up of 401ks, a block of stock from previous employer, and a tiny pension. The only thing I owe is on a credit card - $19,000. In a few days I will receive $1,700 per month, before taxes, of SS. FYI -- support system is a husband who is retired getting $2,500 a month of various income and about $16,000 credit debt of his own. Other than living expenses, we owe nothing else. Q: My block of stock is worth about the same amount as my credit card debt of $19,000. Would it be advisable to sell the stock to pay off my credit card debt? My pension amount is also about the same amount.


Sorry about your lay-off. You've given a good overall picture of your household finances and here are my general thoughts:

Liquidate (former) employer stock 

There are various types of employee stock plans (ESOPs, SPPs, exercised stock options, etc). I'm going to assume for this example that the stock is not in a (pre-tax) retirement plan and that it does have unrealized capital gains.

Based on the info you provided, it appears that you and your husband are in the 15% federal income tax bracket for a couple filing jointly--particularly since you've been unemployed and not drawing social security for five months of 2014. 

Currently, taxpayers in the 10% and 15% federal brackets pay 0% tax on long term capital gains (gains on investments held 12 months or more). Depending on what state you live in, there may be some state tax to pay. You and your husband will want to run the numbers and fine-tune the analysis.

If you can liquidate the employer stock with 0% federal capital gains tax, then that'd be a wonderful swap for paying off your credit card. 

Social Security 

If there are details about the employer stock that weren't included in your question such that liquidating would not be beneficial, then my second choice would be to use your social security to pay down debt. 

Since you and your husband have been able to live on his income sources, the social security benefits you'll start receiving in a few days will be like "found money." I'd be inclined to calculate how much of that's taxable and then use the net amount each month to aggressively pay off your credit card balance. Seems like you should be able to clear that off over 18 months or so (broadly-speaking).

401(k) and other retirement plans 

Since you have two other potentially good options for clearing your credit card, I'd recommend against any withdrawals from your 401(k) or other pre-tax retirement plans for that.

Hope this helps. All the best.