First Person: Sacrificing a 401(k) to Get Out of Debt

Defying Conventional Wisdom, I Used My Retirement Fund to Retire Several Old Debts

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Financial consultants typically will tell you not to touch the money in your 401(k) until you reach 59 ½, the age where you can withdraw funds without penalty. Like many Americans these days, I recently went against that conventional wisdom and cashed out my 401(k) at age 47, using the funds to pay off my outstanding debts.

Money and I have had a long-standing love/hate relationship. After graduating from college in 1985, I applied for an American Express card that was intended for recent graduates. That bit of green plastic let me buy the things I thought I was entitled to as an adult. Unfortunately, I always seemed to spend more than I earned, and the bill always came due at the end of every month.

That first AMEX card set the tone for how I used all my credit lines. After several late pays and a devastating layoff in 1995, I was left with several closed credit card accounts, no income and no plastic to fall back on. Returning to the workforce in 1996, I spent the better part of two years paying off old debts, shoring up my sagging credit rating with secured credit cards.

I thought I had learned my lesson about credit, and while working for A.G. Edwards, a now-shuttered investment firm, I put money aside in both my 401(k) and the company's stock-purchase plan. During the late 1990s, a time when the stock market was roaring, my investment account was rather robust. Unfortunately, I had a habit of going to Las Vegas twice a year for vacation, leaving a lot of my hard-earned investments on the craps table.

Financial institutions made a bumpy transition into the 21st Century, and A.G. Edwards was no exception. Though our management was rather conservative, when the Internet bubble burst in 2000, A.G. Edwards had some cash flow problems. The events of September 11, 2001, also had a crippling effect on the stock market and thousands of our clients.

By 2003, though, I was doing well enough financially to buy a house. At the time, interest rates were so low that owning my own home was an exceptionally attractive proposition, especially at an adjustable rate that started at 3.75 percent.

Confident in my financial situation, I slowly added to my stable of credit cards. Seeing myself as a single, successful guy, I opted for the more prestigious plastic, such as American Express's Platinum Card. This card came with a hefty annual fee of $400, but I liked the fact that I could pull out that credit card and buy what I wanted when I wanted.

As a homeowner, I also was inundated with offers from lending institutions that were very happy to give me unsecured loans. Over time, my first unsecured loan of $9,000 grew into a second mortgage of $36,000. Feeling secure in my future, I didn't worry too much about having a second lien on my home.

In 2007, I woke up to learn that A.G. Edwards, the company I hoped to retired from, had been acquired by Wachovia Securities. As part of the merger, my position was eliminated in early 2008, and I was given an "out date" of March 31, 2009. I decided to make an early exit, though, taking a contracting position with Express Scripts, a pharmacy benefits management company.

The move to the medical field did not pan out, though, and in May 2009, I was out of a job. Surviving on a combination of my freelance writing and credit lines, I hobbled along until I took a new position in Orange County, Calif. I always loved California and it has been a good move overall.

Saddled with credit card debt, two mortgages in St. Louis and monthly rent for a California apartment, I decided to liquidate my 401(k), pay off my credit cards and second mortgage and try to start over. Cashing out the 401(k) was the hardest decision I ever made, but I can honestly say that it saved me a small fortune in interest.

My life has not quite worked out as I expected and, at age 47, I am on the West Coast working on both my tan and rebuilding my retirement fund. Let's hope that the second half of my life is less financially bumpy than the first.

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