Q: I am 55 years old and my husband is 58. We both work in the small business he has owned for over 25 years. Although our business has minimal debt and about three months cash reserves, I am concerned about our long-term viability due to the current economic situation.
We currently owe about $143,000 on our home. Due to the devaluation in the stock market, my IRA is currently worth about $185,000. I am considering cashing it out and paying off our house in order to relieve us of that monthly payment and secure our home. My thought is that if we found ourselves making less income, at least we would not have the house payment. If the business is able to weather the recession, we can sock the money we are not paying on the house into savings. We do have some cash savings, and I will receive a small pension from another job I had for 27 years prior to this one.
I would appreciate your thoughts on this, at our ages.
A: This is definitely a scary time. Unemployment is up. Jobless claims are up. And of course the stock market has dropped to depths we haven’t seen in decades.
But caution is in order for you and, for that matter, many others.
You are actually in good shape. You’ve kept the expenses of the business low and, unlike many in your situation, have reserves. That’s just great. Additionally, you have some savings and a pension, albeit small, to fall back on if times get tougher.
Let’s address your key question—whether to cash out your retirement money. I’m not sure of your exact birthday, but, unless you are 55½, you may still be subject to a 10% penalty for early withdrawal of the IRA money. Plus, you would have to pay ordinary income taxes on the money. That could significantly reduce the payout from your IRA.
But, let’s say you’ve met the age hurdle, and you are past 55½. I would not cash out with the market down so much. Just before Thanksgiving, the Dow Jones Industrial average is down 36% year-to-date. Some folks have seen their retirement investment accounts drop 40%, 50% or even 60%. If you cash out, you lock in those losses. Right now, the losses are only on paper.
At 55, you still have some time to wait for a recovery. And I say that because you appear to be handling your personal and business budget well.
I’m a huge advocate for being free of all debt, including a home mortgage. However, you don’t want to be “house rich and cash poor,” meaning all your money is tied up in your home.
So, keep the mortgage for now. Keep watching your expenses. And don’t worry about the loss of income until it looks like a done deal. Now, I say that while also encouraging you to keep saving, so that if your business sees a slowdown, you have cash to keep you going, and you don’t have to touch the IRA money.