Thoughts on this early retirement plan?

[disneysteve]

I have a relative who plans to retire in May 2010 at the age of 55. He was planning to sell his current home, move out of state and buy his new home for cash. He was then going to tap his IRA using the substantially equal periodic payment method. His advisor just informed him, though, that under that plan, the amount you can withdraw is based on life expectancy. That means he wouldn't be able to take out enough to live on since his life expectancy at age 55 is long.

What the advisor suggested he consider is this. Sell the house but don't use the proceeds to buy the new house. Instead, invest the money in conservative investments like municipal bonds. That will generate more monthly income than he would get from tapping the IRA early. Buy the new house with a mortgage. Right now, he could get a 5-year ARM at 3.75%. That would take him to 60 years old. At that point, he could start drawing from his IRA normally and wouldn't be subject to the life expectancy rules. He could then take the bond principal and pay off the mortgage.

As long as he could invest the money to earn about as much as the rate on the mortgage after taxes (just over 3%), he would at least break even and may even be able to come out ahead on the deal. Plus, he'd have a much higher monthly income that way and his IRA would be left alone to compound tax-free for an additional 5 years.

Can anyone see any major flaws in that plan?

[m3racer]

That sounds pretty solid. He can easily purchase high quality muni's with higher interest rates than 3.75%.

[Broken Arrow]

Well, I can't say I see a technical flaw in the plan per se....

But from a strategic level, all this fancy foot-working makes me wonder if retirement is even a good idea at this point.

Personally, I would hate to just scrape by, because if anything were to happen later on, it would be difficult to re-adjust during retirement. Ideally, it would be much better to shore up his retirement plans, and the best way to do so is to postpone the retirement. Work a little longer, even if it's only part time.

[disneysteve]

Originally Posted by Broken Arrow

Well, I can't say I see a technical flaw in the plan per se....

But from a strategic level, all this fancy foot-working makes me question if retirement is even a good idea at this point.

Personally, I would hate to just scrape by, because if anything were to happen later on, it would be difficult to re-adjust from retirement. Ideally, it would be much better to shore up his retirement defenses by postponing retirement....

I knew someone would bring that up.

He's actually in good shape once he hits 59-1/2. At that point, he can tap his IRA and his 401k and has a decent pension. It is just the period from 55 (he turns 55 in February) to 59-1/2 that is a bit screwy but I think this plan would cover that nicely.

He is a very frugal guy. He is single, never married, no kids. He currently puts 25% of income into his 401k and funds a Roth. He has no debt. He paid off his current home, a duplex that he rents out one floor of, several years ago. He has an excellent financial advisor who he has been working with for a number of years to plan for his exit from the workforce next year.

He is also not opposed to doing some work in retirement. He is a bank auditor and has had a couple of offers to do the same thing on a per diem basis once he moves.

I think he he well positioned overall.

[Broken Arrow]

I see. So, he just has to make it for the next 5 years until retirement.

Hmm... well, even for a short time, I would not chance it. But seeing as how he is not opposed to some work, this should not be an issue. Yeah, I think if he holds at least a part-time job or does freelance or consultancy work, I don't see any problems then.

Until he's 59.5 years old, perhaps "semi-retire" is the operative word.

[EEinNJ]

Major flaw? No Job= Not Qualifying for a mortgage. At least, that's the way it used to be, and I hear lenders are going back to that.

I recommend a book I'm currently reading, "Retire on Less than you think".
One fundamental strategy is to sell a home in a high cost, high tax state (NJ is a prime example used) and buy a house outright somewhere cheap. Another strategy is continuing to work at some level, for health benefits, social reasons, etc.

[disneysteve]

Originally Posted by Broken Arrow

well, even for a short time, I would not chance it.

What is the risk, though? If the investment would generate sufficient income and the money to repay the mortgage would be sitting in a safe investment like a muni bond, I don't see the downside.

Originally Posted by EEinNJ

Major flaw? No Job= Not Qualifying for a mortgage. At least, that's the way it used to be, and I hear lenders are going back to that.

He would be selling his current home and buying the retirement home before he leaves his job, so he would still be employed when he gets the mortgage.

[Scanner]

Why does he need to buy a house?

Why tie up his money?

[disneysteve]

Originally Posted by Scanner

Why does he need to buy a house?

Why tie up his money?

He needs a place to live.

He also needs to house 3 cars - his everyday car and his 2 antique show cars.

[Scanner]

Yeah, but why not lease?

He, under financial advisement, is going to buy a house to surround the garage of his antique cars?

[disneysteve]

Originally Posted by Scanner

Yeah, but why not lease?

He, under financial advisement, is going to buy a house to surround the garage of his antique cars?

Is there a problem with that?

If not for the cars, he'd probably go to a condo, though I still think he would buy. He is 55 so may live another 30 years. Would you suggest someone rent for the next 30 years?

[Scanner]

Would you suggest someone rent for the next 30 years?

Maybe.

Houses are hardly a gain when you factor in mortage interest, taxes, commissions and upkeep. If you are lucky, you break even.

If he's never been married, no kids, etc. . .I would pay somewhere to garage his cars and get a small condo.

I'd keep his money as liquid as possible. . .then you can do more with it to generate income.

[disneysteve]

As I said, though, other than in the first 4 years of retirement, he doesn't need the home sale proceeds to generate income. Between IRA, 401k and pension (and SS once he hits 62 or later), he will have plenty of income.

I don't think he would consider renting a home and renting garage space for the cars. He does a lot of work on the cars himself so he would want them to be with him, not at some other location. That's his main hobby now and will be so even more once he retires.

[Broken Arrow]

What is the risk, though? If the investment would generate sufficient income and the money to repay the mortgage would be sitting in a safe investment like a muni bond, I don't see the downside.

Well, I didn't know enough details to know that the numbers will work out. So, I went by the general principle of not closing any doors prematurely if it can be helped.

But if the numbers do work out, then I don't see any problems.

[kv968]

Originally Posted by disneysteve

He could then take the bond principal and pay off the mortgage.

Can anyone see any major flaws in that plan?

The only "flaw" I really see in this case is what happens if he loses principal on the bond when he cashes it in to pay off the house in 5 years? With interest rates most likely (I would say definitely) going up within that time frame, the price of the bonds will go down. Is he prepared to deal with that? Would he have enough otherwise to pay off the mortgage and if not what does the ARM adjust to?

[disneysteve]

Originally Posted by kv968

The only "flaw" I really see in this case is what happens if he loses principal on the bond when he cashes it in to pay off the house in 5 years?

I would assume the plan would involve investing in a bond or bonds that mature around that time so value fluctuations wouldn't be an issue.

[kv968]

To get a yield of ~3% on a muni-bond, he would most likely have to get a maturity date of about 10 years unless he wouldn't mind holding "B" or less rated bonds or probably paying a premium for it.

[creditcardfree]

I actually think the advisors plan is excellent. It sounds like he has established a great nest egg!

[disneysteve]

Originally Posted by kv968

To get a yield of ~3% on a muni-bond, he would most likely have to get a maturity date of about 10 years unless he wouldn't mind holding "B" or less rated bonds or probably paying a premium for it.

I just did a quick search and found lots of muni bonds earning 3% and up with A ratings or higher that mature in 2015 or 2016. For that matter, the top 5-year CD rate right now is about 3.3% so even that could work (though that is taxable).

I think this would be very achievable.

[kv968]

I think it would be achievable too, I was just adding what I thought might be a possible "flaw", or at least something to consider. I wish him luck.