Dear John: Cash in pension after losing job?

Dear John: I am 58 years old and currently unemployed. I have been in the banking industry for the past 34 years. I lost my job in June.

While I have savings to last me through next July, I have debt that I would like to pay off. I am considering cashing in one of my pension plans with my previous employer. I know cashing in a pension is probably never a good idea unless you roll over, but I would like your advice on my situation.

I have a conventional pension plan worth $185,000 I am looking to cash in. I also have 401(k) plans that I will not touch totaling about $225,000.

Cashing in the $185,000 will allow me to pay off my mortgage, credit-card debt and private loans totaling about $60,000.

I am also saddled with student loans for my two daughters of about $40,000. Interest on the credit cards run about 9 percent and the mortgage is at 5 percent but only has 2 ½ years left to pay off. The private loan is no-interest, but the student debt is costing me 8 percent.

Payments for this debt total about $2,600 per month. These payments are eating up my savings, but I will still last until July.

Employment prospects do not look good. If I can pay off, I would be free of those payments and might possibly find a lower-paying job and not have to worry about the debt.

My salary in my banking career was in the mid-six figures — good money.

Even after cashing in, I would still have my 401(k) and my Social Security to live on when I reach 62. My wife will have hers at 62 as well.

She only has a small pension due her, which will pay about $150 per month. All of these incomes add up to about $4,700 per month once I formally retire. With no debt, I think am OK.

If I did not cash in the $185,000, that would give me another $1,500 per month. I do not believe I will have to pay any penalty to cash in as I was over 55 when I became unemployed.

I do not want to cash everything in and just live on Social Security alone, or work for the rest of my life. I'd like to find a job I can live with, even at a greatly reduced salary, and not have to worry about bills.

Please let me know your thoughts on my issue. Thanks for your time. Mike

Dear Mike: Ah, the Golden Years! Aren't they great?

I asked Scott Brewster, a certified financial planner in Brooklyn, to opine on your situation.

"Sorry to hear," says Brewster, who is a member of the Financial Planning Association. "It must be very stressful after 34 years in the banking industry to lose one's job making mid-six figures and struggle to find another job."

Brewster doesn't think that cashing in your pension early is the solution you need.

"You probably are correct that since you were separated from service after age 55 you might not be hit with the 10 percent penalty on withdrawing your pension money," he says. If the funds were in an Individual Retirement Account, the early withdrawal penalty would apply until the age of 59 ¹/₂ .

But Brewster warns that "you will get taxed on the withdrawal, and $185,000 cashed in might only leave you with $110,000 after taxes. Not only that, you would be reducing your retirement nest egg by close to 50 percent."

He says the real issue is that you are struggling to find work and even with your loans paid off, you are going from making a mid-six-figure income to just looking to get by in a few years on Social Security and a 401(k) that is about equal to what you made in one year while working.

"My action plan for you," says Brewster, "would be to make getting another job your No. 1 priority. Working on finding your next job eight hours a day is not enough. You need to put in overtime securing your next job so that you not only avoid cashing in your pension but are in a position to keep saving more for retirement and pay off your debts from your income."

Mike, (this is John speaking) you and I know that the job market stinks and that you are at an age and salary level when employers think they can get a better deal with someone younger.

So you need to make prospective employers know that you don't have what they call "salary demands." You have, instead, salary suggestions. And that you are very flexible.

And you need to connect anyone from your previous job who might be able to help you find work. Beg them if that's what it takes.

"If you work long and hard all the way until next July when your savings will run out, and you do not find a new job, then you can — without guilt — pull money from your pension, because then you have tried everything you possibly could to not do so," says Brewster.

And even then, Brewster says, he would only pull out what you need to make the minimum loan payments and keep working at the job hunt. "And yes, it is a hunt. You have killed it for a long time, and you need to go back out and continue to kill it," he says.

"With 34 years of experience under your belt, don't sell yourself short. This period of unemployment will pass, and if you throw all your energy into getting to the other side, you will be stronger for it and will have your pension still intact along with your 401(k)," Brewster says.

Both he and I wish you the best of luck. Stay optimistic and smile when you interview. Prospective employers like to hire happy people.