Recast or pay down principal for a near retiree

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Alterdoc
Posts: 2
Joined: Thu Aug 23, 2018 10:38 am

Recast or pay down principal for a near retiree

Post by Alterdoc »

Hi all,

A family member who is near their retirement still has a home mortgage left for $250 k. They have $150k cash to either invest vs. recast to decrease monthly payments vs pay down principal. The home mortgage rate is at 3.75%.

The investment part would be making a down payment towards a rental investment vs Roth contribution.

Thoughts?

Thanks!
PFInterest
Posts: 2684
Joined: Sun Jan 08, 2017 12:25 pm

Re: Recast or pay down principal for a near retiree

Post by PFInterest »

they should do rIRA (assuming, you didnt say), pay mortgage. i think a rental property would be last on that list but to each their own.
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jimb_fromATL
Posts: 2278
Joined: Sun Nov 10, 2013 12:00 pm
Location: Atlanta area & Piedmont Triad NC and Interstate 85 in between.

Re: Recast or pay down principal for a near retiree

Post by jimb_fromATL »

Alterdoc wrote: Thu Aug 23, 2018 10:46 am Hi all,

A family member who is near their retirement still has a home mortgage left for $250 k. They have $150k cash to either invest vs. recast to decrease monthly payments vs pay down principal. The home mortgage rate is at 3.75%.

The investment part would be making a down payment towards a rental investment vs Roth contribution.

Thoughts?

Thanks!
Insufficient data, but if you mean either contribute to Roth IRAs or make the down payment on a rental property, then in my opinion they probably cannot afford the rental property as an investment.

While there's really not enough information to know for sure, in general I think there are a number of things that are much higher priority than a rental property.
  • First would be to contribute the max to any available tax-deferred and tax-advantaged plans such as 401(K)s and IRAs.

    Next would be to build a stash of cash for emergencies to cover at least 6 months to a year of all living expenses.

    Note that iIn addition to the tax advantage, a Roth IRA can also serve as a secondary source of funds in a dire financial emergency, because you can withdraw your contributions at any time without tax or penalty. So it would be more important to take advantage of the once-per-year use-it-or-lose it opportunity to max Roth IRAs instead of putting a lot of extra cash in liquid savings.

    Next would be to eliminate virtually any other debts.

    IMO they should also have a schedule to pay off their own home within a few years -- preferably by retirement time. You can consider paying off the house faster to be equivalent to purchasing an annuity that gives them a return of the mortgage rate -- guaranteed -- whick will result in enough money to pay them the monthly house payment (pre tax) for the number of months they would cut from the original schedule.

    Then, provided they have the temperament to be landlords and enough income and cash to be able to afford the risk, rental estate can be a good way for some folks to invest after-tax money for more tax advantage.

    However, in retirement with presumably lower income in this case, rental real estate is not as advantageous. Furthermore, they'll be tied down to that location if they manage the property themselves, or will lose income if they have to pay a property manager.

How long do they owe on the mortgage?
Do they have 401(k)s or any other tax-deferred retirement plans available?
...and are they contributing the max to them?

How much are they considering paying for a rental property?
How much rent do they think it would bring in?
How well are homes of that type appreciating in value?

Will they have enough income in retirement from pensions and social security to comfortably afford to make the mortgage payment plus taxes, insurance, any HOA or condo fees, plus maintenance and repairs on both homes even if there are prolonged vacancies and the tenant trashes the place?

If they would have to take any money out of tax-advantage retirement plans to make the mortgage payment on their own home or the rental during vacancies, all the more reason to NOT buy a rental and to contribute more to tax advantage retirement plans.

Incidentally, if they are in a tax bracket more than a step or two from the bottom, and if they have 401(k)s and IRA space that they are not maxing, and if their budget is tight at all, it could be better to use some of the cash for living expenses -- if that would be necessary to be able to afford to max all available tax-advantaged retirement plans -- including the catch-up provisions.

Unless they will have HUGE pensions or other income in retirement that total more than they have while they're working, there's no advantage in paying any more taxes than necessary now -- since they wll probably pay a smaller percentage of taxes on their retirement income later. Even more true if they live in Georgia or some other state where they can defer state income taxes now and possibly never have to pay state income tax on retirement income later.

Got more details?

jimb
delamer
Posts: 10894
Joined: Tue Feb 08, 2011 6:13 pm

Re: Recast or pay down principal for a near retiree

Post by delamer »

How much time is left on the mortgage?

Is your relative planning to stay in the house after retirement?
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