Ask the Expert: Weighing major financial decisions

What's your opinion on using a 401(k) to pay off a mortgage? I understand the tax ramifications. It would put us in the highest tax bracket. I'd just like to have this weight off our shoulders. Together, my wife and I would still have a substantial amount in our combined 401(k)s, but they'd take a huge hit.

Don't do this before learning more about the ramifications, preferably with the help of a qualified financial adviser. The huge tax hit isn't the only consideration. What about the impact on your future financial security?

Here’s a couple quick way to gauge that impact:

If you don't yet collect Social Security, use the Social Security Retirement Estimate calculator to project your future benefits. Let's say together you'll collect $6,000 a month, for example. Then add up your monthly living expenses. Let’s say they come to $11,000. Can your retirement savings (and a pension, if you're lucky) make up a $5,000 monthly shortfall?

The current rule-of-thumb to ensure you don't outlive your retirement savings says your yearly withdrawal shouldn't exceed between 3.3% and 4% of your balance, plus inflation. If you have a $1 million nest egg, for example, that means withdrawing between $33,000 and $40,000 the first year. If inflation runs at 5%, the next year you'd withdraw between $34,650 and $42,000.

What does that formula say about the viability of your 401(k) after you've taken out enough to pay off your mortgage and cover the taxes (and any early withdrawal penalty) on the withdrawal?

Finally, compare the ramifications of that hit to your 401(k) with the cost of alternatives like refinancing the mortgage or selling the house and moving to one that's less expensive.

The bottom line

Don't make a major financial decision without learning its potential consequences and considering alternatives.

More information

bit.ly/SSAestimateretirement

bit.ly/morningstar4percentrule