Ask the Get Out of Debt Guy: Should You Use Retirement Funds to Pay Off Debt?

Ask-the-Get-Out-of-Debt-GuyHere at ReadyForZero, we’re all about taking a holistic view of your finances. While we want to focus on helping you get out of debt, there are many ways that you can optimize your finances to both get out of debt and build wealth. One of the most important aspects of this is to educate yourself – which is why we cover so many topics on our blog and our resource centers

But now we’re going to take a step further to make sure that we address everything you need to know in order to optimize for the best financial future possible. How are we going to do this? With the help of our good friend, Steve Rhode! Steve is a well-known debt expert who answers questions on his own website and is now offering help specifically to ReadyForZero users. Read on for today’s topic and answer from Steve!

Today’s question is from someone who is ready for zero – now. He is 29 years old and has enough money in his retirement account to wipe out all of his debt, but isn’t sure if it’s a good idea to do so. Question: Should you use retirement funds to pay off debt?

Steve’s answer to Should You Use Retirement Funds to Pay Off Debt

It really depends on how much of a future sacrifice you are willing to make. There is something called hyperbolic discounting that address just such a situation. Basically that means people will put a greater weight on something happening now rather than in the future. When we do that we tend to abandon logic.

Right now that money in your retirement account feels like it’s burning a hole in your pocket and it’s there to spend. It’s not. It’s there to grow.

Let’s say you tap that fund for $15,000. In fact what you are really doing is draining $154,285. How’s that? Well, if you left that $15,000 in the retirement account and you only average a six percent rate of return, in 40 years it would be worth $154,285. If you averaged a seven and a half percent return it would be worth more than a quarter of a million dollars. To be exact, $270,663.

The better bet would be to use ReadyForZero to pay off the debt in the smartest way possible in the shortest period of time and for the least amount of money. Leave the retirement funds alone. You older self will thank you.

Besides, I’m still waiting to met someone who tells me they retired with too much money.

The opinions stated in these posts are solely the opinions of Steve Rhode, not of ReadyForZero. Are you interested in asking your own question for Steve? Send me an email directly at and use the subject line, “My Money Question”. If you’re more into social media than email, write your question on our Facebook wall or send us a tweet – don’t forget to include the hashtag, #mymoneyquestion!

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  • John S @ Frugal Rules

    I would tend to agree with you on this. It can depend on the situation, but largely I think it makes much more sense to not raid the retirement coffers. Added to that he’s fairly young so he’d be losing a lot of potential growth.

    • Shannon_ReadyForZero

      Good point John!

  • Deanna

    Hi Shannon, My email to you bounced!

    I am writing because two years ago when I had just been diagnosed as being bipolar, that is exactly what I did. I took my $48K in a 401, cashed it out and paid off one credit card. I still have one credit card to go, with a balance of $20K. I can’t cry over spilled milk, I feel great now, so how can I move forward logically? I discovered that I could pay off my credit card more quickly using the ready for zero idea of paying just a little more every month. I don’t actually have that extra money so I am going to get a second job. Thank you very much and I will keep reading the ready for zero blog.

    • Shannon_ReadyForZero

      Hi Deanna, thanks so much for sharing your story with us! You’re absolutely right, the past is in the past and it’s great that you’re now taking steps to move forward! Finding a way to earn extra income is a great start as well as looking for anything you can shave off on your budget like packing lunches or brewing coffee at home. Please keep us posted on how things go for you!

  • TB at

    Yeah I agree, I tend to think that if you’ve got money in retirement, that money that “isn’t yours.” Nope, that money is only for the hands of “future you.” So yeah, that money is there to grow. Not to pay off debt today or buy something cool today. That’s for future you to live on.

    • Shannon_ReadyForZero

      I like the idea of saying that money isn’t yours yet and that it’s for future you. Great point!

  • I am with this answer. I would never use my retirement to pay off debt. In fact, unless I am re-balancing my portfolio or moving money into a different fund allocation, I never even think about my retirement accounts. They are not the answer to debt problems.

    • Shannon_ReadyForZero

      Good idea to just not think about them Grayson, hopefully that helps remove any temptation to use that money for other means. Thanks for sharing!