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Several years ago, my family suffered a financial hardship that left us wondering whether we would be able to keep a roof over our heads. For six months, it seemed like everything that could go wrong did. I was in a car accident that resulted in hefty medical and repair bills, then my wife lost a large account in her freelance writing business, then our apartment flooded and we were forced to pay to replace most of our furnishings.
It was tough. And for a while, we thought our only option would be to drain our retirement accounts in order to stay afloat.
That was when I went to my financial adviser for some help. I knew that withdrawing money from a retirement account is like the kiss of death for future finances. Heavy penalties and taxes, combined with the loss of savings for retirement years, might leave us destitute down the road. I just couldn't see any other option.
What my financial adviser told me came as a surprise.
Personal Loans
This was the option on which my wife and I decided. A personal loan carries interest, of course, which means spending more on what you buy with it than you would have if you'd had the cash to burn. However, it beats paying the penalties and taxes on a retirement account withdrawal.
The caveat here is that all personal loans are not created equal. We visited twelve different banks and credit unions before applying for a personal loan, and we didn't go with the institution at which we maintain our checking and savings accounts. The terms just weren't as favorable.
We borrowed $10,000, and paid it off six months later. Although we could have taken up to five years to pay it back, we got it over with as soon as our financial situation improved. That way, we avoided significant interest. Of course, that means looking for a loan without prepayment penalties.
Credit Cards
My financial adviser suggested this first, but I immediately discounted it. After accumulating tens of thousands of dollars in credit card debt during college, I did not want a repeat of the experience.
However, I can see how credit cards would be preferable to a withdrawal from retirement savings, especially if the borrower can make more than the minimum payment each month. It just wasn't a route I wanted to consider.
Family
In my experience, loans between family members never turn out the way one expects, but it certainly beats a retirement account withdrawal. This wasn't an option for us, but if our kids ever find themselves in financial jeopardy, I hope they will come to us rather than dipping into their retirement savings.
When Retirement Savings are Necessary
My financial adviser told me that, in some cases, none of the alternatives is viable, and consumers must use their retirement accounts to subsidize their living expenses. He explained that it can be done as long as the consumer is willing to pay the penalties and pay back the money in a timely fashion.
