Question: The message from financial experts is generally consistent when it comes to 401(k) funds: Do not withdraw for any reason prior to retirement. I have a question about this assumption. 

I am 45 years old and recently underwent a career change after my previous job became intolerable. I returned to graduate school and accrued about $45,000 in federal student loans. The interest rate on these 10-year loans is 6 percent, with repayment beginning in 2013. I also have a 401(k) worth about $100,000 (roughly $60,000 of my contributions and $40,000 of employer contributions).

It is only best for me to keep my money in the 401(k) and not use it to pay off my student loans, as long as the 401(k) consistently earns at least 6 percent per year over the 10-year life of my student loan, correct?  I realize that an early 401(k) withdrawal would result in a 10 percent early-withdrawal penalty and that any withdrawal would be considered taxable income. This would effectively reduce the amount the 401(k) would need to earn in order to be the better investment. Still, it can’t be much less than 6 percent, can it? Is there anything about my assumptions that are wrong, or is there anything I am overlooking? Derek, Chicago, IL

Answer:  I am one of those people who is reluctant to recommend that anyone ever tap into their retirement savings. It’s hard to set the money aside, and from everything we know at the moment, most people will need the money for their later years. I’m even wary of borrowing from retirement plans, although I have to admit that sometimes it’s the right move.

Here’s my reasoning. See what you think. You don’t know what you’ll make on your retirement savings money. Assuming you’ve created a well-diversified portfolio and a moderate rate of inflation over the next 20 or so years, it’s reasonable to expect you’ll beat inflation by a couple of percentage points. You might win the lottery and enter your retirement years after a long bull market (think 1999) or after bad spell (think 2008). 

You can’t get rid of the investing uncertainty. What you do know is that it’s better to go into the retirement years with savings (or more) rather than without (or less). The risks suggest the importance of maintaining the savings.

More important, you’ve made an investment in a new career that hopefully offers greater emotional and financial rewards. Taken altogether, the tangible and intangible return on that investment will be well above 6 percent. The debt reflects an investment in improving your human capital and your ability to work for a long period of time doing something you like. The return on investment comes through your earnings over the years and it will dwarf whatever you manage to make on your savings. The rewards suggest paying off the investment with earnings.

Of course, it doesn’t always work out that way. Life can be harsh. But for a majority of people in similar circumstances to yours, the investment in education and a career pays off.

So, my question to you is: Why would you want to pay a 10 percent penalty, plus your ordinary income tax rate, to withdraw money from retirement savings when you can retire the debt from your improved earnings instead? I understand the desire to get rid of debt. But unless your back is against the proverbial financial wall, I would pay off your investment with future earnings.  

What do you think?