Cancer Survivor in 40s Is Tempted to Take Retirement Cash and Start Over

Q: I am in my mid-40s, never married, no children. I rent. My only debt is a $6,000 balance on one credit card. My gross salary is $44,000, and it is unlikely I will ever make much more. The company I work for is being sold, and although my job appears to be secure, the new owner does not have a retirement plan.

I will be getting a lump sum from the old plan of $24,000. I am thinking about paying the taxes, then taking what is left and paying off my credit card balance. My reason: I had a serious form of cancer several years ago. I doubt I will live to normal retirement age. I am not happy with my job, and part of me wants to quit, take what money I have and move on. I realize you cannot predict the future (and no one ever thinks he or she will get old), but do you think I am making a mistake here?

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A: You’re not making a mistake. You’re making two of them: using retirement money for any other purpose, and putting your most valuable asset, your earning power, at risk.

You really don’t have any idea how long you will live. You have lived cancer-free for several years and may well continue to do so. Even if you face a recurrence, you have no idea what treatments will be available at that time or how you will respond. Take a cue from the people with HIV who drained their savings and racked up huge credit card bills only to find their death sentences commuted with new drug combinations. They are more healthy, but they’re dealing with significant financial wreckage.

If you don’t roll your retirement account over into an individual retirement account, you will lose about half of it to taxes and penalties. And what’s more important, the money won’t be working for you, earning returns for your later years. That $24,000 could grow to nearly $120,000 by the time you’re ready to retire, assuming an average annual return of 8%. If you really don’t want to save the entire amount, at least roll most of it over into an IRA.

If you don’t like your job, definitely look for a new one. In the meantime, see the next letter about paying off the card debt.

But figure out where you’re sailing before you weigh anchor. Finding another job is much easier when you’re still employed.

Pay Debts First? Or Save?

Q: I hear conflicting advice about whether it’s most important to save for retirement, have an emergency fund or pay off debt.

Which should I do first? I make about $3,000 a month, but after paying all my bills, I only have about $300, so I can’t do everything. If I try, it will take so long to pay off my credit cards or build up my emergency fund that I’m afraid I’ll give up.

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A: A lot of smart financial advisors would tell you to pay off the debt first, then build up your emergency fund, and then save for retirement.

But if you have access to a 401(k) plan and your company matches even part of your contributions, you could be giving up months or even years of free money. Say your company will match half of your contributions up to 6% of your salary, which is a fairly typical arrangement. If you put in $180 a month, then your company chips in $90. You can look at it two ways: as more than $1,000 a year of free money, or as an instant 50% return.

Because you don’t pay taxes on the money that goes into your 401(k), you miss it less when it comes out of your paycheck. That $180 will reduce your paycheck by only $120 or so.

Your 401(k) can also serve as a stand-in for an emergency fund if you get into a financial jam. In most cases it’s a bad idea to borrow against your 401(k), but if you must, you can borrow up to 50% of the balance and pay it back at an interest rate of around 8%.

You can put the rest of the money you have available now--$180 a month--toward paying off your credit cards. If you have $5,000 on credit cards averaging 16% interest, it will take you about three years to pay off your balance at that rate--and that’s assuming you don’t add any more charges (which you won’t, right?).

You can speed your way out of debt by putting every windfall--bonuses, spare change, tax refunds, yard sale proceeds--toward paying off the debt. Boosting your payments by just $66 a month will shave a whole year off the payback period. You may be spending that much, maybe more, on lunches at work; brown-bag it a few days a week and you’ll have the extra cash.

Then once the debt is paid off, put at least the same amount of money in a savings account or money market fund for an emergency account. It could take up to four years to accumulate three months’ worth of expenses at $180 a month, so try to goose that monthly payment with other “found” savings.

Once you see yourself starting to make progress, you may be inspired to save and invest even more.

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Liz Pulliam is a personal finance writer for The Times and a graduate of the certified financial planner training program at UC Irvine. She will answer questions submitted--or inspired--by readers on financial issues in this column. Questions can be sent to her at liz.pulliam@latimes.com or mailed to her in care of Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053. For past Money Talk questions and answers, visit The Times’ Web site at https://www.latimes.com/moneytalk.