401k vs. duplex

[pc56]

Part 1: the problem

I am a 56-year-old man living in Florida. I am employed by an established security/protection company, earning about $33,000 a year. I have zero debt. My house is worth about $360,000 and is in both my name and my wife’s. I also have my own 401K accounts, worth approximately $90,000, with Vanguard and T. Rowe Price. Both accounts are invested in the Retirement Funds, which reflect my retirement age. That is, the funds will automatically adjust their risk level as I get closer to my retirement year. I am fairly healthy, but have no long term healthcare plan or any other savings to rely on. I have no life insurance either, except a small amount that was a free offering from my employer.

I wish to retire within two or three years at the age of 58 or 59, possibly 60 the latest. I need to find a way to produce an income of between $500 to $1,000 per month to live. But I have no idea how to make that money by not continuing to work. Putting the house for rent may be an option, but my wife does not want to do that. Any suggestions you might have would be greatly appreciated.


Part 2: potential solution?

I thought about taking $50,000 from my 401k to use as a down payment to buy a duplex that costs $155,000. I plan to give 30% as a down payment. I could collect rent from both occupants for $1,250. This amount would cover the monthly payment for the mortgage of 30 years. Possibly, from the rent that I collect, I would have $100 to $200 left over each month after paying the mortgage. I could use this amount to cover the expenses for maintenance of the duplex. In doing this, I hope to use the rental property to produce income during my retirement, assuming I live long enough to pay off the mortgage sooner. Or I could sell the duplex for a profit if it continues to increase in value in the future. However, I am also aware that the value could decrease. It’s a fact that I cannot really foresee how this investment will turn out, unlike the 401k.

I also realize that the penalty for early withdrawal of the 401k is 10%, plus I have to report and pay income tax relative to that amount at the end of the year.

To summarize and compare both options I am currently considering: 1) leaving the 401k alone and letting it grow on its own, then withdrawing at the retirement age, or 2) taking a risk and withdrawing the money to invest in a duplex in Florida’s real estate market. Which one of these two plans will likely come out ahead in long term projections? This is one of the most difficult financial decisions I have ever come across. Please advise me in this situation or point me to appropriate resources/experts, if you could. Thanks.

[disneysteve]

401K accounts, worth approximately $90,000

I wish to retire within two or three years at the age of 58 or 59, possibly 60 the latest. I need to find a way to produce an income of between $500 to $1,000 per month to live.

Putting the house for rent may be an option

I thought about taking $50,000 from my 401k to use as a down payment to buy a duplex that costs $155,000

In doing this, I hope to use the rental property to produce income during my retirement, assuming I live long enough to pay off the mortgage sooner. Or I could sell the duplex for a profit if it continues to increase in value in the future.

This is one of the most difficult financial decisions I have ever come across.

Welcome. Unfortunately, I think we are going to hear of more and more people in your situation. Nearing retirement with limited savings trying to figure out how to survive in retirement.

If you keep your 401K of 90K and continue to contribute 10% of salary for 3 more years and earn a 7% return, you will end up with 122K. That could generate an income of about $407/month in year 1 of retirement. That's a pretty good chunk of that minimum $500/month you are looking for. Work 1 more year and that number rises to $446.

If you pull out that money to buy the duplex, you take the huge risks that a) the property value will continue to increase at least as fast as the current investments, b) you will have no trouble keeping the place fully rented at all times and c) you will collect enough in rent to cover all of your expenses AND make a profit on top of that. How realistic is it to expect a positive cash flow of at least $407/month?

You already mentioned, and I wanted to stress, that you would lose 10% of your 401K money, or $9,000 plus taxes if you do an early withdrawal. That's a big chunk or your small portfolio.

What did you mean about renting your house? Where would you live?

Without anymore info or more detailed analysis, I'd say to keep the 401K, keep funding it as fully as possible, work as long as possible and live as cheaply as possible from now on.

[TBH]

Here's another idea:

Sell your house, freeing up well over $300K. Buy the duplex for cash. Live in half. Rent half. Voila. You have your minimum necessary income, and you have another $150K to invest.

For that other $150K, you could either buy a second duplex or invest in the stock market, or both. Say you invested $75K in stocks and made a 50% downpayment on a second duplex.

Now we're talking.

I think you've done really well on your income but it sounds to me like you can't afford to keep the house. Or you can't afford to retire for several more years. Your choice.

[disneysteve]

Sell your house, freeing up well over $300K. Buy the duplex for cash. Live in half. Rent half. Voila. You have your minimum necessary income, and you have another $150K to invest.

This is an incredibly good idea!

Let's say you do this and add $150,000 to your $90,000. That now gives you $240,000. Work 3 more years and invest 10% of income each year and you'll end up with $307,000. That will generate just over $1,000/month in income. That would be added to the income coming in from the duplex rental. You'd be all set!

Kudos, TBH, for this one.

[Ima saver]

My father in law thought he would do that. He sold his lake home and built a duplex. He lived in one side and rented out the other. It was terrible. Even tho he thought he had good tenents., every time they moved out, he had to re do the entire half of the duplex. After doing that 3 times, he is letting the duplex sit empty.
I had 3 rentals and had the same problem. The tenents would "trash" the homes. I sold all 3 for much less than I paid for them. One, I had to auction off and lost big time.
It would not be much of an enjoyable retirement if you have to constantly repair property!
I would advise working longer and putting more into retirment funds.

[anonymous_saver]

It honestly incredibly scares me with learning your age and how much money you have saved towards retirement. My suggestion would be to not buy a duplex. How about downsizing into a $200,000 home with your wife and selling your current home to come away with about a $150,000 profit. Then put this money into a brokerage account to use towards retirement. I think you need much more savings towards retirement, this would bring up your savings to $240,000. I also think it would be a bad decision for you to only work 3 more years. Please try to work more years (maybe up to 65 years old) and try to save more than 10% of your income. I am worried for you that you think $500-$1000/month will be enough to live on in retirement. What about health cost increases???

Does your wife have any retirement savings?

Whatever you do, do not take a loan out from the 401(k)!!! You have limited savings for retirement and should not take the 10% penalty.

I am hoping you take some of my advice. My points really come out of a genuine concern.

Good luck.

[Staceyy]

You could always downsize freeing up more money, or at the age of 62, you could take out a reverse mortgage. I'm assuming you're also counting on collecting social security?

[Ima saver]

I think selling your house and downsizing would be a good idea. However, there is a lot of property on the market in Florida right now. Every one I talk to from Florida has their house for sale right now.

[pc56]

Just wanted to thank everyone for their comments and clarify a few things about my situation.

Although I am currently in fair health, I can't know how much longer that will last, and so what I truly want is to be able to begin enjoying my life more as soon as possible. I am not terribly unhappy with my job, but I do not want to be working for another 9 years if I only have 15 or so more to live. During retirement, I would like to move back to the country I was born in and live a quieter, simpler life among old friends and relatives. So, I would be residing abroad where $1,000 a month is enough to live quite comfortably. That move would vacate the house for renting.

My wife's finances/savings have no bearing on me, because it seems we may very well go our separate ways once this issue is decided. I believe she would like to hang on to the house if she can, but we have yet to sit down and discuss that in earnest. But neither of us wants to do a reverse mortgage.

All that being said, I do find myself agreeing that I probably shouldn't withdraw from my 401k and should just continue contributing to it. I appreciate the idea about selling the house to buy a duplex and living in half. That's a very appealing option.

I'm somewhat puzzled that someone wrote expressing concern bordering on fear for me and my circumstances. True, I don't have the biggest portfolio, but from my perspective, I'm doing okay. I'm not scared. I'm better off than plenty of others my age who I know. Then again, what started these deliberations is another set of friends who said that I have too much money tied up in the house, money that isn't accruing interest or actively yielding anything for me. Those friends are millionaires because they invested in real estate here years ago; they even asked me to join them at the time (which I did not, obviously).

One more option I'm wondering about: borrow money using the house as collateral for the lender, then using that loan money to buy duplexes. Pros? Cons?

[LivingAlmostLarge]

Possible you should decide if you are staying married or not, what it will cost to do so or not and then come here asking for advice. Because you don't really know what it means to your financial future otherwise.

[pc56]

Possible you should decide if you are staying married or not, what it will cost to do so or not and then come here asking for advice. Because you don't really know what it means to your financial future otherwise.

Easier said than done. And not very quickly done, either. In contrast, I think I need to get some more informed opinions right away to help me plan. For now, let's assume the extra wrinkle of the marriage is taken out of these considerations (or at least, won't have hugely disruptive/negative financial consequences). I'm trying to come up with a variety of options for the two of us to discuss.

[Fern]

You haven't told us what country you're planning on moving to. I think the concern voiced on an earlier post was based on the assumption you'd be living in the US, and i, too, would think it quite difficult to make $90K last your lifetime.

Also, if your health is okay now, what makes you think you have just 15 years to live? It could easily be more like 30.

[disneysteve]

I'm somewhat puzzled that someone wrote expressing concern bordering on fear for me and my circumstances.

Honestly, I'd be quite concerned about someone with only 90K saved and planning to retire in 2-3 years at a young age. Do you have a pension? I don't think that was mentioned. What about health insurance? I guess what a few of us aren't understanding is how you possibly expect to live on 90K. You can't collect SS until at least 62 and you can't get on Medicare until 65. As I showed earlier, your current savings will only generate about $400/month income. If that will be your sole income (until SS starts), that isn't very much at all. Now if you will be moving to another country where cost of living is much lower, that's a whole different story, but I wouldn't want to have to live on $4,800/year in the US.

[ktmarvels]

My step-father just retired and it is costing him about $500 a month for health insurance for him and another $300 for my mom. So if you don't have health insurance that would quickly eat up more than the $400 a month you are aiming for.

[LivingAlmostLarge]

Are you ill with a fatal illness thus only living 15 more years? I was rereading the post and realized that you said you don't want to work 9 more years and live 15. Geez, I'd be living now.