Leave Retirement Funds Alone!

The other day I saw a search phrase someone used to find this site that really made me think.  The query was “Should I cash out my IRA to pay debt?“  Now, y’all know I am all about paying debt off and getting debt free, but my visceral and knee-jerk reaction to that query was a resounding “NO!  Don’t do it!”

I’m over-educated enough to have done too many exponential growth homework problems in pre-calculus and calculus classes.  I know the one thing that is required to reach the steep side of a logarithmic curve is TIME.  I can draw it out on paper (because I learned to do these calculations back in the dark ages) but I am really not very good at explaning the details.  What I can explain is that when the growth curve goes up noticeably, it ends up looking like a seriously steep cliff.

OK, enough nerdiness.  Let’s break this down to its most basic level.  When playing with compound interest, the growth looks small for about 10 or 15 years.  This is the time that little retirement fund is in the most danger of being raided: it doesn’t look like its working (even though it actually is).  From the dark recesses of your mind, the thought emerges: Hey this retirement money isn’t doing so hot and I could use it for paying off debt (or worse yet, some “want”).


I’m going way back to the first month of blogging to pull out some numbers Dan the Numbers Man gave me on hubby’s truck note and how much we could have if we invested the money instead of paying off the truck.  Let’s pretend we actually DID invest it (and ignore the big piece of Detroit steel in our driveway).

  • $488.47 per month invested instead of paying on the truck, figuring 10% interest
  • Balance after one year:   $6,189
  • Balance after 5 years:      ~$38,000
  • Balance after 10 years:    ~$100,000
  • Balance after 20 years:   ~$374,000
  • Balance after 30 years:  ~$1,123,072.23

So at the 10 year mark, we would have put in $58,616.40 and “only” had about $100,000.  That’s the “danger zone” for retirement funds, because after 10 years of life people can often be in big debt and think they can raid the retirement fund to get out.  It’s also right before the curve starts to get steep and begins to do the real work of “the magic of compound interest.”

The numbers between year 10 and year 20 get interesting.  Considering absolutely no increase in contributions (still $488.47 a month) by year 20 we would have put in $117,232.80 and had over $374,000!  Now THAT is noticeable!  And that is what people who  withdraw retirement funds to pay debt will be missing.  The numbers just get more heartbreaking after that: After 30 years of investing the truck note at $488.47 a month, we ould have contributed only $175,849.20 and had over $1,123,000 for our efforts.

I’ve heard some folks say that for a person in their mid-30s to early 40s, every $1,000 you pull out of a retirement fund costs you over $10,000 at the age of retirement.  It’s even uglier for someone still in their 20s to early 30s.  The number jumps for every year of your age that you move down the scale, since time is your friend when talking about compound interest and retirement funds.

So what’s the point of this, other than making me hate that truck all over again?  Don’t cash out your retirement fund to get out of debt.  Make a budget, cut expenses, get a second job, or sell some things to get out of debt.  You just can’t afford to unplug your retirement money!