I ran across this guy the other day (not my client)

Poor guy looses his job....has about $200k in his 401k and only bill he has is his house and truck. Has some cash on hand about half a years pay approx $50k.

Single guy and doesn't spend a whole bunch.

What's the first thing he does you may be wondering?

Well that would be to pay off his house with all of his 401k.

his words, "my house is paid off, now I don't have to worry about anything"

Great job...enjoy eating cat food for lunch when you have to work until you are 80.

Serious question, do you think that Dave Ramsey's advice has anything to do with that situation? Seems like a lot of people have that mindset that any debt is bad no matter how cheap the interest is and they lack the foresight to see the bigger picture.

What a dumb ass...  

I am not sure if he knew about DR, but down here people have the biggest boner for paying off their house despite borrowing at 2%.

I can't tell you  how many  people the first thing they do when they get fired is to pay off their house with their 401k. Like no one ever runs the #'s, ever.

Take out of your 401k and pay 10% penalty plus income tax for the feds plus state income tax. so like 35%.....well golly gee, I wonder how many times 3% on that mortgage goes into 35% from taking the money out of your 401k.

I mean does that person plan on not working for the next 10 years?

wow

That was a mistake.

I view my rentals as my retirement. I view my 401k as an emergency fund if i got fired or something went bad.

Thats my last bit of cash. I can assure you that you would have to fight me for every goddamn dollar out of that 401k.

When it runs out, id be done. Id tell the bank to take their shit and id eat a pistol in a field somewhere in the country.

My goal would be to make that money last as long as possible. Lol.

Net worth, debt, profit, none of that means shit if you cant cashflow. I lost my life savings in my early 20s because my business went under. Profitable every month for 40 months, cash flow negative for 36 out of 40.

People dont get that. Hurrdy durr. Debt is bad zomg. Sack up nancy and take the stress. Let it consume you. Its necessary to have debt in most situations. Cash is what matters. Being able to pay your bills another month.

This all has to do with how long he thinks he will not have meaningful income. It's a hell of alot better to have the house paid off than to lose it because you can make the payments.

Why wouldn't he only pay what he needs to pay, when he has to, rather than deplete all of his cash reserves instantly? And take the full penalty?

So lets say he gets a job tomorrow. He just took a 20,000 penalty on cashing out his 401k and I imagine he has to pay around 40,000 in taxes on it unless he was old enough to take out money.

So he burned 60 grand for no reason.

Even if he is old enough to take the money, lets say his roof needs replaced or a/c. He needs 10 grand but he doesn't have it now because he blew it all paying it off?

I can't fathom a situation where that makes sense.

If he plans on never being able to work again, (maybe that's the case since he made 10 or 15 years in payments all at once?), then he should probably look at downsizing since his entire retirement was only enough to pay his house off.

That paid off house doesn't mean paid off taxes, insurance, or maintenance.

Wow, that's idiotic for so many reasons...

Dude freaked the fuck out and made a terrible choice.

Yep it was a dumb ass move......it wasn't like he had the cash on hand.

Not to mention at what point was he in the amortization schedule.

Go look at the amount of interest you are paying in the last years of a mortgage at 3%. then look at how much you are going to get smoked by Uncle Sugar on taxes, penalties and the state at that.

Soooooooooooooooooo

let's say you have a 30 yr loan at 3,5% that was @200k......things are going great and now with 12 years left to pay on the loan you loose your job.

Your balance is right above $100,000 left to pay off.

What do you do?  
Option 1: Fuck my retirement I need to pay off my house because at least my house is paid off and Dave Ramsey said ok.....well allrighty then...let's do sum maths.....$100,000 divided by .70 (10% penalty, 15% Fed taes, 5% state taxes here)......cost of this = $42,857

Well but midcap but midcap....that's the price of freedom...



Let's go back to the beginning.....how much interest would I owe if I just kept paying my note?

$21,142....you would have had only that amount of interest left to pay.

Literally half.....and and if you are in your 40's...you should really get another job and not retire at that point considering your assets are only $200k

The Ramsey guys will never agree with this, but I would argue if you figure that inflation averages 2 or 2.5%, borrowed money is very cheap, and historical market returns are what, may be 5 or 6% at least, that there really isn't a true net loss associated with the house note when inflation is figured. You should still come out 1 or 2 points ahead by keeping it in the market and paying the interest.

If my dad would have listened to Dave Ramsey he wouldn't be where he is right now....same thing as myself.

Also....being that I work with accredited investors...I am not forced into investing in the "market" so those numbers don't get me excited and make my personal hypo's much better.

Also...a big thing to realize is that everyone uses the average returns of the market.....you really can't use an average since the returns are non-linear.

For example.....take this year 16% gainz, which is double the average historical return.

So in 1 year, you have made 5 years of interest off of your investments. That puts you in a very interesting position.

Ramsey has a place. If you have no self control or weren't taught about money growing up and all you want is to raise a family, pay off your house, and do just be average through retirement then it's not a bad system.

The problem for me is that i'm not smart enough make the kind of money it takes to outearn inflation. At some point you hit a peak and no matter how much you save in a year, your disposable income will only replace the value that was lost that year due to inflation. That makes me feel uncomfortable. Very uncomfortable. Work all year so your nest egg is worth the same as it was the year before. Fuck that.

If want to be above average then ramsey will remove any chance of that ever happening. This isn't a savers economy.

I think d ramsey would agree that was a bad move. There are better ways than ramsey but I think his way would be an improvement for the majority of people. Some people are more comfortable with debt than others. Most people I know are in deeper than they wish.

I've listened to Dave Ramsey for years and never heard him tell anyone to pay off their house with 401K money unless they were doing it without penalty. Even then rarely if ever can I remember him telling anyone to use 401K money to pay off debt.

Correct, because he doesn't say to do that. I don't listen to his program, but I read Finanial Peace and I remember him saying having a paid off house and being broke in retirement--he see's that a lot that it is stupid.

I've never heard Dave tell someone to take a penalty of the 401K to pay off their house. If anything he would tell them to sell any extra stuff he may have to put towards the house, or to sell the house and move to a smaller cheaper house.

Yep the ONLY time Dave says to touch retirement money is to avoid bankruptcy or a foreclosure.

It was a dumb move.

I don't follow Dave 100% but he has a lot of wise things to say. I used to love debt and he tought me to hate it and it has changed my life dramatically. I was never in financial trouble or anything like that I was just spinning my wheels and not increasing my net worth.

If a dental room counts I can get this thread back on track.  Lady comes in with a bombed out mouth.  So I am going through the tx needed to not end up in a denture.  She cuts me off after a couple sentences looks me dead in the eye and says.   I'm not interested in that, when do I get my 3rd set of teeth.  All I could do was blink and I said excuse me and left the room.    She was mid 40s.

Why? Again, congrats! you saved your house, but now you won't be able to retire.

Also, no one ever puts the money back.

She thought she was a shark?

What do you mean? I agree cashing out your 401k to pay off your house is dumb but I don't think it is dumb to take some cash out of retirement to avoid a foreclosure. What if you have a 500k house you have been paying on for years or even decades and you lose your job and can't make the payments.  I would pull from retirement to make the payments until I found other employment if need be. I wouldn't pay it off but would use retirement money as needed to stay afloat.

I own my house outright.

My motivation:  Maslow's hierarchy.  I need shelter for me and my wife for the rest of our life, and our kids need shelter for at least the next 16 years.
I was laid off when my first employer closed up shop and shipped the jobs to Asia.
The next place I worked had six subsequent rounds of layoffs and reduced headcount at my site 330 to 120 over the five years I worked there.
During that time we were having kids.

I threw all my extra cash (rainy day/layoff fund excluded) at the house.
I cashed out a portion of the retirement fund to pay off the house.

I fully understand that I traded a great chance of greater wealth in many years for ownership of an essential item that will be adequate for the remainder of my life.  

Our household income is square in the middle quintile.  I am the only person I know who owns his house.
My retirement portfolio ... well ... we are working on it, and if my health holds out I plan to work another 30 years.

I don't regret it even if it didn't make the most financial sense.

SPNI.

Took the 10% penalty and a bunch of income.  House rich, cash poor, plus income in this year vs next when potentially income might be lower.

That's why you always hear people talk about 6-12 months of income liquid. Then it depends on how much you have in your retirement and other things.

What I see happen is that people will spend their retirement assets down to shit, and still lose the house.

Why didn't you sell your house for a cheaper smaller one?

The average working guy is obsessed with paying off their house.  I have seen guys pass up 2 to 1 matches on 401Ks to pay extra on their house.  I think that women are worse than men.

It is no wonder most working folks struggle financially.

That's because they buy too much house.

Those same people are fine with paying $600 on a car note.

I agree 100%. I don't have 6-12 months of my income liquid but I do have a couple years worth of living expenses liquid. My house is paid for so it isn't a concern for me but I was just saying if I did have a mortgage, lost my job and I ran out of savings, I would pull from retirement as needed to make the monthly mortgage payment assuming there was a end plan in site.

It is flat out retarded what banks will approve people for on a house and the average person takes whatever they are approved for as what they should spend. My house cost 1/4 of what I was approved for and I own the house it doesn't own me. Don't even get me started on car payments. That is another are where people buy the max they can approved for.

I agree with a lot of what DR says...some very sound advice and simple philosophies in his plan that unfortunately aren't taught to many people at home by their parents anymore.  Add to that some extremely predatory lending tactics of young people in High School and College, and you get people that get in way over their head at a very young age.  As other's posted, I don't know that I've ever seen any advice that could be construed to do what this guy did.  The mortgage is usually the last thing Dave recommends to pay off since it is usually one of the lowest rate loans, and typically also has some advantages such as tax write off on the interest paid.

The only thing that makes sense is the guy might be ready to be done with the corporate life, and is going to get a job making $10 an hour driving a fork lift at Home Depot or something.  He can use that money for his basic living expenses, and not have to worry about losing his house.  With out a mortgage payment of anytime, a single person could get by on a pretty low weekly / monthly cashflow and have an ok standard of living.  Maybe he even is going to re-start his retirement savings in a new job.

If he had 200k in a 401k, my guess is he isn't exactly close to retirement age (at least I hope not) and may still have a fairly decent number of years ahead of him to work on a retirement plan, especially if a single guy.

The location was west Michigan, timeframe was during the recession.  Two years worth of market supply, lots of distressed properties, nothing worth moving out of the house we liked, away from the area and property we liked, and away from good neighbors.  Without additional payment I would have been underwater at that time.  Furthermore, the house styling was "unique" - rustic A frame.  When we bought I deliberately went smaller and cheaper ($125k) rather than the max I could afford (realistically on my income alone at the time somewhere in the 160s), let alone the stupid high amount the bank would loan (225k).  (GD would tell me to go be poor somewhere else.)  We were simply living within our means.  While doing so we made it a priority to pay off the note, and got it done in 7 years.

I guess I should add that I only stopped contributions to the 401k when the company stopped all matching, and that I was selective regarding withdrawal of retirement funds, primarily focusing on the portions of Roth IRAs I held for 5 years, and allowing short term layoffs to work to my favor to limit taxes and withdrawal penalties.  Remember, I was also watching the company walk people out left and right, along with a whole lot of other companies during that time.

It turns out that a different job in a different area led us to sell for a modest gain and move a few years after paying it off.  I used that money to pay cash for the house we are currently in.  Now, I am funding a Roth IRA instead of making a house payment.  Maybe my view of housing is that it is less an investment and more like an automobile.  A tool to be used.  For whatever reason, that's something I want to own.

I'll add that my actions weren't influenced by Dave Ramsey.  I financed a new vehicle a few months ago because it made the most sense.  We have financed vehicles before, and will do it again.  Debt is a tool, and Dave Ramsey has great advice for those who have trouble using it responsibly.

This resonates with me.  I have the freedom to choose work and working conditions I truly enjoy without the fear of losing my home.