Feb 21, 2025
You’ve lived life as a typical middle-class American — balancing spending and saving, planning for retirement and accumulating some debt along the way. Then the unimaginable happens: you’re diagnosed with a terminal illness and given just three to five years to live.
It’s a reality no one wants to face, yet some of us may one day find ourselves in this position.
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With limited savings, mounting medical expenses and concerns about your loved ones’ financial future, you may consider draining your 401(k) to cover costs. At first glance this might seem like the simplest solution, but is it the smartest one? Let’s explore the pros and cons.
Balancing comfort with financial security
Let’s consider the scenario of someone who’s just received an end-stage diagnosis. When facing that news, ensuring a comfortable and stress-free end-of-life experience becomes a top priority.
In-home palliative care can cost up to $6,500 per month if not covered by Medicare — and that’s assuming you don’t require round-the-clock care. Using the $270,000 in your 401(k) could help pay for these expenses, allowing you to focus on your well-being without financial stress.
Beyond medical costs, tapping into your retirement savings could significantly improve your quality of life. That money could allow you to address your $30,000 in debt, stop working, travel or check off bucket-list experiences with your family.
Additionally, terminally ill individuals may qualify for penalty-free withdrawals from their retirement accounts under the SECURE 2.0 Act, making early access to funds more financially feasible.
However, before making any major financial decisions, consider the long-term consequences.
If you have dependents, emptying your 401(k) may not be the best move for their financial security. While penalty-free withdrawals are possible, the money you take out may still be taxable, potentially impacting your beneficiaries’ tax brackets and overall financial stability.
Estate planning also becomes a critical factor. If you withdraw and spend all your retirement savings, your loved ones will inherit significantly less. Keeping funds in your 401(k) allows for better estate management, ensuring your assets are distributed according to your wishes.
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And then there’s the unknown factor — life expectancy is never guaranteed. According to the Journal of Palliative Medicine, 12–15% of hospice patients live beyond six months. If you outlive your initial prognosis, having already depleted your funds could leave you in a difficult financial situation.
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Dealing with death and debt
If you believe you are about to pass on soon, ignoring debts seems like an easy choice. But your debt does not disappear after death.
Creditors can still go after what you owe. Any money, property and other assets left in your estate will be used to repay debts before getting distributed to your beneficiaries. If you already drained your retirement account, you risk leaving loved ones in an even bigger financial bind.
If your estate does not cover all the debt you owe, creditors may choose to write off the balance. But again, this is only after exhausting all remaining assets.
There are options for terminally ill individuals to help with debt before their passing. Debt consolidation, charitable assistance programs and selling your life insurance policy may all be avenues to manage debt. Consider focusing on secured debts first, such as car loans and mortgages, as those could be repossessed for failure to pay.
Most importantly, these options should be explored before passing to secure your estate.
Planning for the future
No one’s future is certain, and living with a terminal illness only emphasizes that more.
Whether you’ve decided to spend your final days living life to the fullest or remaining cautious for the sake of your family, smart financial planning is always the best choice.
Drafting a will, establishing beneficiaries, listing your assets and updating your estate plan ensures a smoother path through end-of-life care, allowing you to spend the most time with your family and to make your final moments and dollars count.
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Chris Clark is a Kansas City–based freelance journalist covering personal finance, housing and retirement. A former Associated Press editor and reporter, he writes plainspoken stories that help readers make smarter financial decisions.
