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Dear MarketWatch,
I’m 55 and will retire with a healthy pension ($5,000 a month) this year. My boyfriend and I just purchased a home and put down $150,000 on the $390,000 purchase price. He will have a healthy pension in retirement also.
I have about $300,000 in a 403(b). I am considering taking money out to pay down the mortgage when I retire — our interest rate is 6.375% on $240,000. My interest rate on my prior home was 2.25% ,and this high rate is killing me.
I realize I will have to pay taxes on any withdrawals. My healthcare is paid for, and I will be eligible for Social Security at 62. Our property taxes are around $11,000 a year, and we are wanting to pay down the mortgage as much as possible. Your thoughts?
Dear reader,
I understand how frustrating that interest rate must be for you, especially after having a significantly lower rate in the recent past. Still, I wouldn’t suggest you jump to your retirement account to pay down your mortgage quicker. There’s a lot to consider before making that decision.
First, the good stuff: Having your healthcare paid for in retirement is fantastic. That is such a huge expense for retirees, so to have a perk like that is incredibly helpful. The monthly $5,000 pension check is another big plus.
That doesn’t mean you should take the $300,000 in your 403(b) lightly, though. It’s a lot of money, but retirement is one of those things you can only plan so much for … as no one knows how long it will last or the circumstances within it. There’s definitely no way to know how much it will all cost, either. Before you choose to raid that account, run a ton of numbers.
For example, I always suggest starting with the absolute basics. How much do you have coming in and how much do you have going out. Do all of your expenses fit within that $5,000 pension check? And do you already have an emergency savings account to help should you find yourself in a predicament — new house or old house, there’s always something to pay for! If you have an emergency savings account already, wonderful, but if you don’t, a portion of that income should be funneled into an account you can tap should the unexpected arise. Even if you do have an emergency savings account, do you have enough in there? Some advisers suggest three to six months’ living expenses, but since you’re retiring, having a year’s worth of expenses wouldn’t be the worst thing in the world.
There’s nothing wrong with planning for Social Security, but for this exercise, don’t count it as part of your income just yet. You can run a separate analysis with what you expect that amount to be in seven years (and even use their own projected figures, which you can find if you make an account with the Social Security Administration), but we want to be as conservative in our estimates as possible, so let’s leave it out for now and the future.
Then get serious with your boyfriend about how all of the bills will be paid, and what should happen if an emergency does come up. Do you both have money to fall back on? Will everything be split 50/50, and if not, who has what responsibilities? Look carefully at how the house is titled — if you take money out of your own retirement account and put it toward the mortgage, and if you two were to split and sell the home, how would your portion with those retirement assets be handled? These are not exactly the most romantic conversation topics, but they’re important. The answers should also be in writing—it’ll prevent headaches if something goes wrong.
You’re right, you would have to pay taxes on the withdrawal. Are you planning to take a little more cash than you need to pay for that tax bill, or do you have excess money set aside to pay those taxes so you can retain as much in your 403(b) as possible? In the past, advisers have also told me to do a comparison of rates — that is, the interest rate you’re paying for your mortgage versus the rate of return on your retirement account. If the former is less than the latter, you may want to keep the money in your retirement account for now as it will earn more.
Envision what it would look like if you didn’t withdraw any money from your 403(b) plan. Is throwing extra cash at your mortgage every month possible in a postretirement budget, or how might it change your lifestyle? Making extra payments directly toward your principal (you’d have to tell your lender that any additional payments are to be put toward the principal only) can speed up your payoff date.
The problem with withdrawing from a retirement account is that you can’t put the money back in later on.
Not to rain on your parade, but you also don’t want to take too much money out and find yourself in a situation later on where you really need it. Retirement can be a very long chapter of your life — you’re only 55 years old. Social Security and pension aside, having that money to fall back on is and would be a relief. Ask yourself questions like “would I feel comfortable with $250,000 in that account, or $200,000?” If you have any doubts, don’t do it just yet.
One rule of thumb is based on how well you can sleep at night. If the interest rate on your mortgage hurts you so much that it’s all you can think about, then yes, you do have to do something about it. But for now, holding off on withdrawing from your 403(b) to put extra money toward your mortgage may be the best bet. It doesn’t mean you can never do it, but it doesn’t have to be a rushed decision.
Readers: Do you have suggestions for this reader? Add them in the comments below.
Have a question about your own retirement savings? Email us at HelpMeRetire@marketwatch.com
