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10 years from retirement, hopefully

Posted by marys1000 (My Page) on
Fri, May 18, 07 at 11:16

Background: I have not done a good job of taking care of myself financially althougth I'm better of than a lot of people I'm sure. If I manage to retire at 60 it will be at a very basic level of existance (buy a tiny house somewhere and hunker down). My major retirement piece is a partially matched 401K. I have contributed well, certainly above matching, but have not done well in moving things around between the various funds so there hasn't been much growth, or maybe there's been growth but also lots of losses? and while I have not crunched the numbers it has not done well at all.
Here's my current decision dilemma. Hoping to sell my new, been in less than 2 years, current house and relocate to a different state. (Market is problematic and I will lose money on the sale especially after realtor costs.)
But I had a lot of cash in the place and will get a fair bit back (say 100,000).
Do I buy - in a rust belt midwest city (not Detroit but extremely similar with perhaps even less future)where appreciation is low normally and probably terrible the next 10 years (I expect a recession and am worried about layoffs where I am going to work).
Or do I rent and invest it? I would be paying taxes out the nose.
Or do I buy something very small and pay cash.
Or do I buy something, small or not, do a small downpayment, get the tax break on the mortgage and invest the rest?
I have no idea.
Thank you

Follow-Up Postings:

RE: 10 years from retirement, hopefully

Are you set on retiring at 60? Medicare and Social Security won't be there for you until 62, and that is a huge piece of the puzzle. Covering everything, especially health costs, out of pocket those two years will cost you a serious bundle vs. waiting.

The investment and housing markets could go any which way, so predicting that horse race over a short stretch of 5-10 years is dicey. Sounds like you have had bad luck with your portfolio in the relatively good recent times. Figuring out why may be important. Learn from that "have not done well in moving things around between the various funds". Chasing profits by switching funds can hurt a lot over time. Better to have a reasoned plan and stick to it.

And selling your house in a bad market could be more of the same. Might it be better to ride the slump out?

Taking early retirement (and 60 is early) may not be worth the price of "hunkerimg down in a rust belt city" just to survive. To do what? (not knocking the rust belt cities - I live in one - but responding to your sounding like this wouldn't exactly be the time of your life)

Maybe think more about what kind of work you might WANT to do next and where you would WANT to live. And how to make that happen. It is trite but true: you get only this one life to spend.

RE: 10 years from retirement, hopefully

If any one of us could tell you for sure... :-) But here are my thoughts:

Do I buy - in a rust belt midwest city (not Detroit but extremely similar with perhaps even less future)where appreciation is low normally and probably terrible the next 10 years (I expect a recession and am worried about layoffs where I am going to work).
IMHO, that's a tricky one. How recession-proof is your line of work -- or do you have other skills which would earn you a paycheck during a recession? What is your timeline for selling this house? Could you wait out a recession? If you have to sell, you may have lots of company, and that will hurt house sale prices even more.

Or do I rent and invest it? I would be paying taxes out the nose.
See fourth question.

Or do I buy something very small and pay cash.
What can you buy for 100 grand? Here in the Twin Cities, that wouldn't give you much -- either a bad house in a bad neighborhood "in town" or a house out in some fourth-tier suburb. How important is it to you to have the deed to your house in your hand?

Or do I buy something, small or not, do a small downpayment, get the tax break on the mortgage and invest the rest?
I think that beats renting. Put 20% down (avoids mortgage insurance, which, IMHO, is just a hole to throw money into; could get you a better rate). OTOH, if you expect a glut of apartment/rental space, rental rates will reflect that lack of demand fasterl

Or do I buy something very small and pay cash.
I think much of this depends on exactly what you can buy for the cash you have available. Around here in the Twin Cities, you'd be hard-pressed to find an at-all-decent house for 100 grand. Would the house be something you wanted to/could live in, in a neighborhood you think is okay? And how important is it to your financial well-being (or comfort) to have the deed to your house in your hand?

Or do I buy something, small or not, do a small downpayment, get the tax break on the mortgage and invest the rest?
Personally, that's my preferred choice. I would aim for a 20% down payment (avoids mortgage insurance, which, IMHO, is just a hole to throw money into). I was going to say to not buy more house than you need, but I live by myself in a three-bedroom rambler, purchased partially because I don't think I'll ever have trouble selling a three-bedroom rambler. Especially one with room downstairs for more bedrooms.

RE: 10 years from retirement, hopefully

I appreciate the responses.

Celtic Moon - I should be eligible for two very small annuities at 60, one from my main employer (the bulk of retirement is 401K) and from the Air National guard. I'm assuming I can start using the 401K at that point but am not sure I should. The ANG medical kicks in at 60, I think I have to pay in but it should be more reasonable than just being out on my own. Of course that's assuming that all the benefits dont' change and it wouldn't surprise me if they did. I don't think we have any idea yet how much the war has cost but I think its going to be a huge shock. I doubt if those will be enough to live on but am wondering if I can maybe pick up something part time. Either way I would not longer be saving any money.
-The bad luck with my portfolio was NOT from chasing profits but just leaving everything where I iniitally put it which was not good despite what everyone says about good times. Apparently.
-I'm not sure how you want me to ride the slump out by not selling my house since I'm relocating 4 states away. Rent it?
-Hunkering down in retirement would most likely be in a smaller city somewhere else. The rust belt city is where I'm moving for employment. That's not where I want to retire.

Steve-o, normally I'd say my line of work is recession proof. However the war in Iraq is costing DoD so big and I think many many checks have been written that have not been cashed and won't be till after this administration. They are downsizing the Air Force, military and civilians to try to pay some of the shortfalls now, I can only assume it will get worse. No, I don't know what else I would do though I wouldn't want to stay in that city if I lost my job.
If large cuts were to happens, the housing market in this city where the DoD is the largest employer will go from one of the higher foreclosure rates in the country now to worse. So if I do buy a house I would have a tough time selling. I would like to think though that while we make take some hits it won't be too bad. Very hard to predict and one of the reasons I was thinking of buying some little piece of crap.
For say 130,000 or so I can buy a little 3 bedroom, 1 bath, 1 garage 1950's ranch in a slightly run down but safe neighborhood with a decent commute. Certainly suitable to my needs even if living in the burbs chafes. Not sure where these neighborhoods will be headed in 10 years but shouldn't become unsafe even if they slide downhill in terms of maintenance and cost.
For plus or minus 100,000 I can buy a little 900 sq' older 2 bed bungalow almost anywhere. The plus or minus is based on location. And they are all painted white - why is that?:) They would keep the rain off my head just fine probably.

Its not that important to have the deed in my hand - just whatever works best financially.

The alternative is I've been looking for something in the country with a little wildlife and privacy. That's what I like, what I want but am wondering if I should suck it up, live in the burbs and try to work whatever extra money I have harder. Finda place in the country I like has been more difficult than I thought too since a lot of the houses in the country are surrounded by crop land, so even if its on a couple of acres or more there aren't many trees and you are fairly exposed and there's not much for wildlife. The prices are 230 to 300. If my house sells at anything close to asking I could do that with a mortgage. But should I?
Rent? Buy? Buy small and cheap? Buy small and sort of cheap? Buy what I want and throw caution to the winds? The real estate market and all that is certainly part of it but I'm trying to look at that as part of this bigger picture am I'm just feeling lost.

RE: 10 years from retirement, hopefully

Mary, thanks for the additional detail. Keeping in mind that we are not financial or real-estate professionals (though I think that, collectively, we're smarter than the average bears), I'm thinking that renting in this new city is your best bet. Well, half of your best bet.

Renting will give you maximum flexibility. I don't know how familiar you are with your destination city, but renting would give you time to discover the stuff the Chamber of Commerce neglects to tell people. Renting, at the very worst, would subject you to finishing a lease, not having to sell (or dump) a property at a time when economic conditions force many others to do the same. Renting also likely will take less of a bite out of your budget. It doesn't sound at all like you need to live in a McMansion, so a decent apartment in a decent neighborhood should run considerably less than a house, leaving more money for investment or just seeing which way the wind is blowing. The difference between renting an apartment and paying a mortgage and property taxes on a house (with some $$ set aside for maintenance)) could be considerable. You can always buy a house if you feel more comfortable about the economics of it, and if you find what you want (not merely what will suffice).

The other part of this "best bet" is to get thee to a fee-paid financial advisor. You already have a considerable amount of money set aside in your 401(k). You should make it work harder, too. It sounds like reading about investment and actively tracking your portfolio is not an activity you enjoy or give a high priority. So let someone else do it. Pay a couple hundred dollars for an assessment of your investment goals and styles, rebalance your 401(k), and invest additional money in whatever makes sense for you. You don't say how many years you have until 60 (and I don't need to know :-) ), but it makes sense to let your money work as hard for you as it can. It's still a bit of a gamble that what you invest in will return in the black. But it sounds like there are better choices for you to make, and it's no crime to get some help in making those choices.

RE: Ten years from retirement

You don't say how many years you have until 60 (and I don't need to know :-) )

Yes, you do. All I had to do was read the title. Oh well -- it doesn't change my recommendations.

RE: 10 years from retirement, hopefully

I just have two comments (I'm retired now)

1) Definitely follow Steve's advice re seeing a financial planner (make certain that he/she is a fee based Certified Financial Planner)

2) You might consider sharing a rental for a year while you check out the local landscape. As Steve pointed out, buying in a distant city puts you somewhat at a disadvantage. If you share a rental with a compatible roomate, you will have time to assess your new situation, get your bearings, and at the same time keep your cost of living down.

RE: 10 years from retirement, hopefully

Mary - when you talk about your 401K, are you talking about the Federal TSP? If so, what funds do you have your money allocated?

If you're close to retirement, G is safest, but since you don't have alot saved, you need to be a bit more aggressive. You should diversify the funds and not try moving money in and out.

I've been in C/S/I for a couple months now after trying to time the market. I've made a nice return.

If you're in the TSP, I have a very helpful group that focusses on that. The girl who runs it knows her stuff.

RE: 10 years from retirement, hopefully

Mary, those annuities and the heath coverage do make a huge difference.

Sorry, I completely misunderstood that the upcoming move was in play. I get it now: the move to the midwest is happening, hence the question about buying outright vs mortgaging vs renting. (I don't think as clear late at night. Duh.)

Renting and getting familiar with the new city first does make sense. Especally if your house takes a while to sell. Also gives you time to consider the NEXT phase (60 plus) and where you want to be. If you loathe this next city, you may want to do some exploring elsewhere and it'd be nice to have the cash to 'invest' in that exploration.

No one knows for sure, but most pundits expect housing appreciation to be pretty slow in the midwest. Probably beaten by 5% fixed returns on safe, short term investments. You will get hit with taxes coming and going (taxed investment earnings and missed mortgage interest deduction). But you are experiencing firsthand now the perils of a stalled market. You don't want to go through that again.

Agree a good financial planner might help you construct a plan that best addresses all these factors.

Good luck with the sale and the move and the job!

RE: 10 years from retirement, hopefully

Also, it is possible to find a CFP who will work with you on a commission/hourly basis, rather than through annual fee. It isn't optimal, but could get you at least pointed in the right direction. Make sure you get your CFP referrals through one of the professional organizations, such as the ones referred to in the thread "Financial Planners - Lessons Learned" (linked below).

I agree with the rental suggestions. You shouldn't be buying in your circumstances without being more familiar with the area.

Good luck!

Here is a link that might be useful: Financial Planners thread

RE: 10 years from retirement, hopefully

Again, thanks for the inputs. This past weekend I drove out and looked around the relocation destination. Not sure I'm not making a mistake here. The place is a dump (and I do say that with real sympathy as I'm from Michigan and understand the effects long term high unemployment rates can have, still) Advice here, seeing the place with my own eyes, not seeing anything I would want to buy - I will rent for now. I will add though that rent will not be cheaper than my current house payment, I have some cash in the house. Thats short term. I will probably be asking this question again in a year:)
Sparksals - I do hope you check back as yes I'm talking about TSP and I have contributed up the yang and have not done well at all. I sure could use your and your groups help. Steve o is right on the money. I do not track these things. I may make the right choice on advice to move money. But 6 years later when I should have moved it somewhere else at 3 years I suddenly find I've lost a bunch.
I will wait to try to find a CFP in my new location.

RE: 10 years from retirement, hopefully

Actually, Medicare won't be there for anybody until age 65, unless you're disabled.

You can take Social Security early, but not Medicare.

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