Return to the Household Finances Forum | Post a Follow-Up

 o
Mortgage Payoff With Retirement Funds

Posted by macey (My Page) on
Tue, Jan 3, 12 at 19:31

Looking for some guidance on our situation as it relates to paying off our mortgage with a portion of our 401K and other retirement accounts.
- Current value of our primary residence is around 750K (Southern California). Mortgage is around 240K @ 4.75 with around 9 years to pay off.
- We also own a condo in Palm Springs. There is no note on the condo but we have line of against the above primary residence of 86K which was used to purchase and remodel the PS Condo. The value of the condo is around 150K.
- I turned 60 in December 2011 and my wife is 49. We both have steady professional jobs and work for multi-billion dollar companies.
- Mine is new construction related so business will remain sketchy for the balance of my career(5 years) but only 30% of my 100K compensation is commission based.
- My wife makes around 150K a year with 115K being salary the balance being quarterly bonuses.
- I plan to retire at 65(sooner if possible) Id like to see my wife retire around 59 so we can enjoy things before "old age" sets in on me.
- We have no long term debt other than the $240K mortgage and line of 86K credit.
- Credit cards are paid to zero balance each month.
- Liquid cash runs around 50K in savings. It seems like we have frequent family financial situations we end up supporting. Otherwise, we would have a stronger savings account.
- Currently we have the following retirement funds tucked away:
- My 401K = 311K plus a company pension of around 54K which currently has an estimated payout of $425 per month at age 66 or 67.
- My wife has several 401K funds:
- Current Employer 401K = 120K
- Prior Employer # 1 = 57K (no active contributions being made)
- Prior Employer #2 = 125K (no active contributions being made)
- Prior Employer #3 = 175K (no active contributions being made)
- Together we have three other stock investment funds totaling around 71K. (no active contributions being made)
- All totaled our nest egg (excluding the house value) is around 926K.

Since we have always been of the "no mortgage is a great thing" mind set, we are wondering if given the combination of remaining 10 plus working years my wife has and our combined portfolio of 401K and other funds, does it make sense for us to consider paying off the 240K mortgage by using some combination of funds from these retirement accounts? We want to feel the fresh air of no mortgage debt.


Follow-Up Postings:

 o
RE: Mortgage Payoff With Retirement Funds

Start by doubling the principle payment on both mortgage payments each month, and you'll pay off both in 1/2 the time.

If your wife retires before she turns 65, will she have medical coverage? That will be a major expense until she qualifies for Medicare.

And you'll have a huge tax hit on withdrawing the retirement funds. You won't pay a penalty on your withdrawals, but you will pay federal and state income taxes. So for $326,000 needed to pay off the mortgages, you'll have tax bill of what? more than $100000? (And don't forget the CA state income tax.)

So just add extra each month to your payments and pay off your mortgages sooner that way.


 o
RE: Mortgage Payoff With Retirement Funds

I don't think you are NEARLY as prepared for retirement as you think you are. Your savings are only about 4 times earnings. Unless you are planning to take a MAJOR step down in lifestyle, you need about 5 times that to generate the type of income you are used to. You really are in no position to be drawing down the funds you do have.

If you plan on retiring in 5 years, you need to really buckle down on savings and start cutting expenses. If you are used to living on $250k, you could blow through a million bucks in 4 years.


 o
RE: Mortgage Payoff With Retirement Funds

I 2nd the pay down your mortgage but do NOT extract from your retirement. You calculate close to a million in net assets but that can change quickly if the market hiccups.

If I calculate your salaries correctly - you only have 2.5 months in savings and you indicate the cash reserves are low because of repeat family issues which surfaced. What guarantees do you have those hiccups won't resurface?
If you pay down your mortgage from retirement and any of those issues occurs what is your option? Take out a home equity?

I would just pay down HELOC 1st (as it will be available) and mortgage with ALL extra funding.

If you really want to experiment - budget for 2012 as a retire. Live off ONLY your pension & SS payments - all income from work goes towards mortgage and HELOC. It will prove to you whether you have enough for retirement AND significantly reduce your debt which is 326K.


 o
RE: Mortgage Payoff With Retirement Funds

Thanks to all. Very good points and gives me clairity.


 o
RE: Mortgage Payoff With Retirement Funds

I wouldn't tap into the retirement to pay off the mortgage because then you'll lose the tax deferment on the growth. And you'd be withdrawing it when your income is at its peak, thus hitting you with the highest tax bracket, rather than later in retirement when you can withdraw less and keep yourselves in a lower tax bracket.

You've got sufficient income to pay off your 2 mortgages very quickly (like 3 years) if you cut your expenses and live leaner. And it can be a great goal to work towards with your wife, hitting the mortgage hard each month with all the extra cash you can scrounge up and watching the balance plummet. I think that would be more satisfying (because of the effort involved) than just writing a check from your 401(k).

I agree with Bill as well: If your savings relative to your income demonstrates that you're living on just a tad less than you make, then your lifestyle needs to decrease either now, so you can save up enough to maintain that lifestyle in retirement, or later, because you won't have enough saved to maintain it.

Finally, this:
"It seems like we have frequent family financial situations we end up supporting."
sounds like you repeatedly fund kids making stupid financial choices. If this is true, then you're doing them a disservice by robbing them of the opportunity to struggle and succeed on their own. Take away the safety net and allow them to grow.


 o
RE: Mortgage Payoff With Retirement Funds

"Your savings are only about 4 times earnings. Unless you are planning to take a MAJOR step down in lifestyle, you need about 5 times that to generate the type of income you are used to."

While I agree that you need to save quite a bit more, you do not need to save 20 times your current income to retire at 65. After you retire, you'll no longer be saving for retirement, so you can reduce your annual income by that amount. Secondly, you will eventually pay off those mortgages, either before retirement or perhaps a few years after. That will reduce your income needs by a considerable amount. Thirdly, you'll both be collecting SS, which will replace some of the incvome you no longer have from working. Plus, you will get monthly income from your pension. And most retirees see their income needs go down as the years pass, with the important exception of medical expenses.

And I agree that retired people should not assume the financial needs of family memebers. Once you're no longer working, you must put your own needs firs,lest you run out of money in your old age and become a burden to your family.

You should really use a good online retirement calculator (T Rowe Price or Fidelity) to get a better handle on how much income you'll actually need and how much you need to save to get there. You're likely to find that the nestegg amount will come in at something more like 12 to 15 times your annual income goal in retirement.

After doing that, you'll be in a much better position to decide how and when you should pay off your mortgage debt.


 o
RE: Mortgage Payoff With Retirement Funds

"Most retirees see their income needs go down as the years pass, with the important exception of medical expenses"

Those expenses can be HUGE, even for someone whose attempted to do everything right. That is what scares me.


 o
RE: Mortgage Payoff With Retirement Funds

If someone making $250k has trouble saving more than $50k in an emergency fund, then they are spending almost all of their income. If the wife is going to retire at 59, their expenses might actually go up due to healthcare costs.

The "you don't need as much money in retirement" line of thinking only works if you actually scale back your expenses. Anyone retiring when they are "young enough to still have fun" better not be counting on that though.

Also, in those calculators, you either input a certain rate of return or they assume it for you. Currently, any "safe" investments are making almost nothing. Unless that turns around, that means that anyone retiring now will likely be eating into their nest egg way faster than retirees in the past.


 o
RE: Mortgage Payoff With Retirement Funds

I agree with everyone so far - ramp up your savings, lower your spending, and do extra payments on the mortgage debt. Please don't take money out of your IRA to pay your mortgage off. At your tax rate, that's really robbing Peter to pay Paul.

You have a good start on your investment account. Think of it as you've got half and your spouse has half. You mention your pension, what does your spouse have? We don't need to know, you just need to think about this.

Half a million $$ on a 4% draw-down - which is generous, most advisors nowadays advise 3% - is $20K per spouse, before taxes. With tax hikes almost certain to come in the future, what are you estimating as your future tax rate? Have you looked into Roth conversions? Instead of throwing all your bonuses and extra funds into the mortgage, you might get a better return by splitting the money and using some of it to pay the taxes on the conversions each year before retirement.

Also, your spouse needs to roll over those 401k's into one IRA. Trust me, if anything happens to her, it's a paperwork headache for the survivor to get that done. It takes time and energy, and when somebody's grieving, it's the last thing one wants to do. But it's a necessity if you don't want the IRS to get involved.

I'm going to offer some questions for you to think about because you are at the perfect point to start doing serious retirement planning. The reason you need to figure out if your assumptions are correct for future savings and the best return on spending, is that if those assumptions are wrong or plain bad luck intervenes, you still have time to adjust and make corrections.

Have you and your wife sat down to talk specifically about what both of you envision retirement to be? What's your 'bucket list'? What's hers? What do you want to do in retirement? How much will it cost to do those things?

For example: I retired 2 yrs before DH did. Our expenses did NOT go down and our income stayed static because we were contributing as much as we could to DH's 401k. But when he did retire, our expenses jumped overall. We have retirement health benefits, so there was no extra cost there. But we wanted to travel locally, and even that required several hundred $$ of clothing and travel accessories.

We were able to donate an entire carload of work clothes to charity, which was great for deserving poor folks, but no one was going to pay us for them. That first year we spent almost four months out of twelve traveling through Northern CA and the PNW, mostly car trips but a few airline trips, at a cost of almost $25K post-tax. We do what I consider to be mid-level travel: not budget or RV travel, but not luxury high-end places either.

If I were in your situation I would find a certified or registered financial advisor to run some numbers. What will happen if one of you dies? What happens if one of you gets disabled and needs care? What happens to the surviving spouse if death or disability happens BEFORE retirement? Are you adequately insured to mitigate the bigger risks in your life (and it takes some analysis to figure out what those risks are, that might prevent you from achieving your goals)? Do you have enough $$ coming in for a sufficient 'cushion', especially if you intend to maintain two houses in retirement?

Do you know what medical insurance will cost for a pre-Medicare senior? What if a serious medical condition happens and one spouse becomes uninsurable, or at least rateable? Can the budget afford the insurance and any needed medications or extra co-pays? How do you plan to handle long term care costs for one of you? For both of you?

These kinds of questions are just as important, perhaps even more so, than the simple question of "should I pay off my mortgage with IRA money."

HTH, and good luck going forward.


 o
RE: Mortgage Payoff With Retirement Funds

"If someone making $250k has trouble saving more than $50k in an emergency fund, then they are spending almost all of their income."

1. The OP explained that the additional money that would have gone into savings was instead given to family members. I would hope that financial aid to family members would fall into the area of discretionary spending, not living expenses, once this couple retires. It's up to them to decide whether they want to save even more money now so that they can continue providing this assistance once they're retired. I certainly don't think they should be expected to do that.

2. Pretty obviously, since both the OP and his wife are actively contributing to their 401Ks, they are not "spending" that part of their income.

3. Rather than automatically assuming they will need to replace the entirety of their present income, they should make realistic estimates of what their retirement living expenses are actually likely to be. That is the only way to plan intelligently.

4. The current rate of return on investments is very low by historical standards. That is a big problem for people retiring right now or in the immediate future, but that's not what the OP plans to do.

It is very unlikely that the present investment climate will continue on very far into the future. The good calculators rely on Monte Carlo simulations to make predictions about how likely your savings will last for X number of years of retirement under a variety of economic conditions, ranging from best case to worst case.


 o
RE: Mortgage Payoff With Retirement Funds

401k contributions are capped, so you can't get anywhere close to 250k with that. Besides, my point was that they aren't anywhere close to having enough money put aside to retire. Whether they need 20x their current income or 15x their current income really isn't the point. That will vary from person to person, but almost nobody will be OK with 4x income unless they have a major pension plan.

I'm a firm believer of planning for the worst and hoping for the best. Anybody planning to retire in the short term (and 5 years is the short term) shouldn't be looking at historical averages. Save the averages for people who are 10+ years out.


 o
RE: Mortgage Payoff With Retirement Funds

Interesting. My DH and I make a bit less, but have no mortgage (it's paid off) and have twice as much in IRAs and other retirement accounts. We realized 20 years ago that we needed to set aside about 25% of our gross income each year if we were going to be comfortable.

I agree with billl, weedy, jkom, and others. Increase payments to pay off the second home, then the first. Cut your living expenses (learn to cook, etc) which helps you save and helps you understand what it will be like to live on less in retirement. If you feel too restricted by the strict budget, then consider working for longer. I am a bit older than you, and still working because I love my job and because DH is not eligible yet to retire.

Where you are is the cumulative result of your choices. Best of luck.


 o
RE: Mortgage Payoff With Retirement Funds

Just one point that I didn't see anyone mention (but just skimmed the responses).

You say you plan to retire at 65? are you going to way until age 66 to collect SS? Can you afford to do that? It's not worth taking SS at age 65 and giving up the extra you'd get if you wait till 66 to file. Be sure you look at that, when making your plans.


 o Post a Follow-Up

Please Note: Only registered members are able to post messages to this forum.

    If you are a member, please log in.

    If you aren't yet a member, join now!


Return to the Household Finances Forum

Information about Posting

  • You must be logged in to post a message. Once you are logged in, a posting window will appear at the bottom of the messages. If you are not a member, please register for an account.
  • Posting is a two-step process. Once you have composed your message, you will be taken to the preview page. You will then have a chance to review your post, make changes and upload photos.
  • After posting your message, you may need to refresh the forum page in order to see it.
  • Before posting copyrighted material, please read about Copyright and Fair Use.
  • We have a strict no-advertising policy!
  • If you would like to practice posting or uploading photos, please visit our Test forum.
  • If you need assistance, please Contact Us and we will be happy to help.


Learn more about in-text links on this page here