How to Diversify? When/What to Pay Off? When is Enough, Enough?

[strangebrew]

Hi,

Thinking about the future and seeking opinions and advice.

We like to think we are retirement savvy. But everyday it seems like the sky is falling. Since one of us has hit the BIG50 this year, retirement is on our minds more than ever.

Here are some basics.

Age = 50 and 49, both employed.

First to retire in 7 years is an option

Both max out 401K(22,500),TSP(17,500) and Roth IRAs(10,000)

Approx 650,000 in retirement funds

3 houses, 2 rentals and 1 primary. Rentals take care of themselves, looking more at the long term and selling or paying off at 59 1/2.

3 mortgages, all manageable with one income. Mortgage is our only debt. Pay off credit cards each month. No car debt. As a rule, not a fan of debt other than mortgages.

Kids are done, college was paid for.

No inheritance to mention, not counting on social security either.

We spend some because we feel we save a lot now.

Our questions...Pay off mortgage? Invest more in the stock market or housing market? Invest less and save more cash?

Not getting great financial advice from the pros so...Thoughts please?

[bjl584]

I think that you will need to work longer than 7 years for two reasons:

1) You need more in retirement savings

2) You should strive to be debt free when you do retire

If I were you I would want the mortgage notes gone before I retired. I'd probably accomplish that by sellng the rentals or at least one of the rentals and using the proceeds to knock down the mortgage debt. Then you would be able to keep fully funding retirement without diverting cashflow.

What is your current income? Expenses? What do you anticipate expenses to be in retirement?

[debtupset]

I'd say both. Split your focus. I don't want a mortgage when I retire, especially three. But I also would want a little more for retirement. I don't know all the ins-and-outs of your situation and if you want to keep all three houses. But maybe focus on paying off the one you want to keep above the others. I'd sell the other two when the market recovers. That way my main mortgage is paid off, the other two are gone, and my retirement fund is freed up for day-to-day expenses and not a mortgage.

[Petunia 100]

One spouse is a federal employee, so is there a pension in your future? What about health benefits?

You have 650k now and will continue to save 50k per year for the next 7 years, which ignoring any gains/losses will put you at 1 million.

Is that enough to retire? It depends on how much you plan to spend each year.

[MonkeyMama]

I always hesitate to answer these questions with so little info given - the best you will get is broad advice. For one, don't think you said what your income is?

BUT - it seems to me you are doing just fine on the retirement. If you can stay employed and contributing $50k to tax-deferred options, puts you at about $2 mil in a decade. You might not be counting on social security - but it will probably be there, in addition. This puts you in a pretty strong spot. (Plus, you mentioned rental income).

I'd advise paying down the mortgages. Again, not sure how large they are or what the interest rates are. But, from a tax standpoint and financial health standpoint it just makes the most sense (pay off mortgage versus increasing taxable investments). Most pros will advise you to leverage because most pros want you to invest with *them* instead of paying off your debts.

As you pay off each mortgage, use the cash flow to bulk up retirement savings even more. Seems pretty win-win. (I assume you mean using current income to pay off - not using savings?) As others mentioned, you can also just divide savings between mortgage paydowns and saving more for retirement.

Helpful info would be your current income and the amount and interest rate left on each mortgage. Plus, how much you have to save each month?

[strangebrew]

Original Poster Here,

Thanks for the replies.

Some answers...

Wife is the government employee, lower of the two incomes and who qualifies for retirement in 7 years. Retirement is an option at that time, not required. Wife "pension" is minimal so that is what we are planning for health care cost/insurance as wife carries insurance for both now.

As a couple, 150,000 per year net.

Husband will continue to work until age 60, no pension--up to both actually to plan/save for retirement.

The rentals cover themselves, mortgages (escrowed) plus maintenance. So they are no loss, no gain type situation. Long term tenants, all good. We are also in a decent market so easy to rent or sell, could get what we owe at least.

Expenses, 2500-ish. Primary mortgage is 700, rest is mostly entertainment.

Like I said, we save a lot, we spend some. Could save more? Sure we could. Life is short, we are healthy now and who knows what the future will bring. Husband travels with his job, wife could tag along if retired. My parents say, live a little now too because who knows what will happen in the future. And we have loosened up about spending. But my Dad has a nice pension and didn't need to think about saving like we do. We are the tail end of the boomers and it should be interesting how all this plays out. A lot of people are going to have an eye-opener. Hard to believe that in 12 years when one of us could start getting SSI--we are not planning on any money being there for us, after paying into it all of our working lives.

It seems like the advice we are getting from the pros revolves around beating the tax system--dont pay off this because you can't deduct that--lower your tax bracket. Buy MY mutual funds or get an equity line of credit for more cash flow in case of an emergency. None are answering the questions.

The best advice we ever got was from an older couple who told us like it is for them and I guess that's what we are looking for here too. We appreciate the comments--keep 'em coming.

Like I said, just thinking about it. Can't hurt to keep plugging along as is.

Guess we want our cake and eat it too.

[Wino]

Just a general comment concerning paying taxes:

To set up your finances around avoiding taxes might make sense for a corporation with a team of accountants to do it, but it doesn't make sense for an individual or couple. Maximize your earnings, and pay the taxes. I'd rather pay 20% of $100K than to keep 90% of $50K.

[MonkeyMama]

Original Poster Here,

Expenses, 2500-ish. Primary mortgage is 700, rest is mostly entertainment.

It seems like the advice we are getting from the pros revolves around beating the tax system--dont pay off this because you can't deduct that--lower your tax bracket. Buy MY mutual funds or get an equity line of credit for more cash flow in case of an emergency. None are answering the questions.

The best advice we ever got was from an older couple who told us like it is for them and I guess that's what we are looking for here too. We appreciate the comments--keep 'em coming.

That is not tax advice - that is biased advice from mutual fund and mortgage companies - from sales people.

General tax advice is to max out every retirement vehicle possible, pay off the mortgages, and then consider taxable investments. I work with a lot of high-wealth individuals - in general your age and time of life is the time to pay off any and all mortgages. & to bulk up savings. It's not particularly a time to take risks with borrowed money. (Maxing out retirement vehicles does help the mutual fund companies too, but it's a REALLY GOOD tax break - so is a little different).

As long as you can stay employed, these will be very good financial years for you. You will be paying off the last of your debts and are able to save at a decent clip (higher income less expenses than when you were younger, I presume). Those low expenses will be your best asset of all. Splurge on one-time things like travel and entertainment - or one-time purchases that are low maintenance - avoid lifestyle creep.

[dontgopoor]

I really like what Monkeymama and BJL posted - good advice.

I'll add that it's great that you enjoy your life. But I get the sense that you may be spending a bit too much that could be used to pay off the mortgages even faster.

Are you "enjoying life" because you think you'll die tomorrow? Or because you have not until recently? Try to understand why you spend so much on fun. Too much fun now may lead to challenges in a few years. Find a balance between fun today and fun tomorrow.

[jpg7n16]

Wife is the government employee, lower of the two incomes and who qualifies for retirement in 7 years. Retirement is an option at that time, not required. Wife "pension" is minimal so that is what we are planning for health care cost/insurance as wife carries insurance for both now.

Wife will be under 59 1/2 and have to navigate early withdrawal penalties. Prob shouldn't retire just yet, unless one income is able to fully sustain your standard of living + investments are more than on pace to retire and maintain lifestyle.

Hard to believe that in 12 years when one of us could start getting SSI--we are not planning on any money being there for us, after paying into it all of our working lives.

You probably should not start taking SSI at 62, even if you could. It's likely more beneficial to delay taking it.

Like I said, just thinking about it. Can't hurt to keep plugging along as is.

Run through a quick retirement calculator, just to see how things really look:

AARP Retirement Calculator - How to Retire, Plan for Retirement

Tell us what you find with the figures.

Not getting great financial advice from the pros so...Thoughts please?

And who are "the pros"??

[kv968]

You probably should not start taking SSI at 62, even if you could. It's likely more beneficial to delay taking it.

I agree with jpg, it's probably beneficial to delay taking SSI but you have to look at longevity factors the best you can also.

If you start taking SSI at 62 you'd get $700 out of every $1000 you'd have received had you waited until age 67. However within that 5 year span from age 62 to 67 you would have gotten $42k in SSI (assuming you were only scheduled to receive $1000 at full retirement age).

Had you waited until age 67 and received the full $1000 it would take you 11.7 years to breakeven with the earlier distributions.

So if there's a chance (i.e. genetics, family history, etc...) that you may not live until age 78 and beyond you might be better off taking the early SSI at least for one of you.