En español | Q: We have about $15,000 in credit card debt. I think we should take money out of our savings (about $100,000) to pay off these debts. My wife thinks we should just pay them down on our annual income of $90,000 gross. Who's right?
--Marc, 65, Arlington, Texas
A: In this case, your strategy is probably best. Since you have the cash on hand, I'd recommend that you go ahead and pay off the credit card debt in order to be rid of it sooner rather than later. Eliminating your credit card debt will make it far easier for you to ease into retirement with the least amount of financial strain.
See also: Boosting credit, reducing debt.
Recognize, however, that this situation isn't as clear-cut as you might think. The best way to determine what to do is to look at three factors: the financial implications, the emotional ramifications and the retirement considerations.
The Financial Implications
Start by examining the economics of your present situation. What's the average interest rate on your credit cards versus the return rate you're getting on your savings? Since your credit card interest rate likely far exceeds the rate on your savings, it may seem like a no-brainer — financially speaking — to immediately get rid of the debt using savings.
Let's not forget, though, that by tapping your savings, you'll be forgoing any potential upside of keeping that money in a savings/investment account. Depending on where your savings are held, you may also have to tap a certificate of deposit, or pay any taxes or penalties to access that cash.
But let's say you took your wife's approach and paid off the $15,000 in debt through your earnings over, say, three years. At that pace, and assuming a 14.5 percent interest rate (the national average), you'd have to pay $516 a month to the credit card companies. Taking into account all your other bills, is such an aggressive payoff plan financially palatable to you?