65 and 63 year old - retirement question (non-investment)

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defscott627
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65 and 63 year old - retirement question (non-investment)

Post by defscott627 » Sat Oct 29, 2016 12:48 pm

Hi!

I am writing on behalf of my parents (who I've actually asked posts about here before). This isn't an investment question per se, so I thought this was the appropriate forum.

Age: 65 (Him) and 62 (Her)
Income: $70K (Him)
$10K (Her, part-time)
$12K (Her, Social Security)
$8K (Him starting January 3, 2017 when he turns 66. This is the Social Security spousal benefit only - he is delaying until 70)

Cash Accounts: $90K in Checkings/Savings
Retirement Accounts: $350K (25/75 allocation approximately - not too heavy in stock).
Debt: $204,000 at 4.5% interest on their house (House is worth approximately 750K in Queens, NY). The mortgage is currently $1,140 a month.

I have asked this before, but I now have the aforementioned information regarding my parents finances so I thought maybe now it would be easier to write for advice. The bottom line right now is my parents want to keep their house in retirement. They purchased the house in 1977 - it was the first house in my entire family that was ever purchased, and although I know this forum is against any type of emotional connections to properties, it is what it is. My goal right now is to help them stay in the house and not screw them up financially in retirement (I.e. make sure they don't outlive all of their money)- not necessarily to maximize their retirement savings.

My dad is planning on continuing to work until 70 so he can collect his full SS benefit. At 70 years old, my parents will collect $3047 + $1002 monthly for a total of $4049 monthly. I have calculated their bills with them. We have calculated that their monthly bills (WITH their current mortgage payment of 1,140) will be about $3500 - this includes EVERYTHING - all taxes on the house, insurance, health insurance, cars, car insurance, etc. This does not include their food for the month though, but everything else is included.

The Question: My parents are interested in taking $50k out of their checkings/savings (since they have way more than 6 months of expenses right now), and taking another $50k out of their retirement accounts and pay that $100k toward the mortgage. Then, they will refinance their mortgage (which will be approximately $100k) at a 3.25% interest rate with the nearby credit union they have been speaking to. This will lower their monthly payment on the mortgage to $450-$470 a month making their monthly expenses go down to $2800 a month (remember they will collect $4049 monthly from social security).

What are your thoughts? My thoughts are that this could work. They aren't "Spending" 100k but instead shifting it to the house equity (they would have about 650k worth of equity and get to stay in the home that they bought 40 years ago). They still have a surplus of 1300 monthly from their S.S. benefits minus whatever they spend on food. And they will still have $300k in retirement for any unforeseen expenses (as well as the ability to sell the house of course). If my father were to pass before my mom, she would claim his $3047 benefit, which should still be enough to cover her, as the monthly expenses we calculated would go down to about 2000 a month.

Miriam2
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Re: 65 and 63 year old - retirement question (non-investment)

Post by Miriam2 » Sat Oct 29, 2016 1:06 pm

Just a thought - what would the figures look like if your parents did not put the $100,000 towards refinancing the house, but kept it prudently invested (perhaps earning something more than zero, such as Ally Bank 1% or CDs) and instead simply refinanced the $204,000 - 4.5% mortgage to a lower rate? The Finance Buff has pointed out that interest rates are very low right now and he suggests checking with LendingTree for some figures. You might get a lower rate than 3.25% that would still bring down their monthly mortgage payment without putting their savings into an ill-liquid house.

delamer
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Re: 65 and 63 year old - retirement question (non-investment)

Post by delamer » Sat Oct 29, 2016 1:16 pm

I know you emphasized everything being covered by the $3500/month (except food), but does it include federal, state, and local taxes? I realize that that these may be quite low, but maybe not zero.

Also, have you taken into account any RMD's that may be required from your father's retirement accounts shortly after he stops working?

defscott627
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Re: 65 and 63 year old - retirement question (non-investment)

Post by defscott627 » Sat Oct 29, 2016 1:20 pm

Miriam2 wrote:Just a thought - what would the figures look like if your parents did not put the $100,000 towards refinancing the house, but kept it prudently invested (perhaps earning something more than zero, such as Ally Bank 1% or CDs) and instead simply refinanced the $204,000 - 4.5% mortgage to a lower rate? The Finance Buff has pointed out that interest rates are very low right now and he suggests checking with LendingTree for some figures. You might get a lower rate than 3.25% that would still bring down their monthly mortgage payment without putting their savings into an ill-liquid house.


If they refinanced the 204K it would be about 900 monthly (around $200 cheaper than they pay now). Then they would earn a little less than $100 a month at a bank like Ally Bank, so it would be about $300 cheaper than they pay now versus $700 cheaper if they put 100k towards the house. I'd be more worried about the house being ill-liquid if they didn't also have the 300k in retirement.

defscott627
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Re: 65 and 63 year old - retirement question (non-investment)

Post by defscott627 » Sat Oct 29, 2016 1:23 pm

delamer wrote:I know you emphasized everything being covered by the $3500/month (except food), but does it include federal, state, and local taxes? I realize that that these may be quite low, but maybe not zero.

Also, have you taken into account any RMD's that may be required from your father's retirement accounts shortly after he stops working?


It should include the federal/state/local taxes that they may pay (with all their deductions from taxes, mortgage etc.) I haven't thought about the RMD's - but even if he had to withdraw and put it into a CD or savings account, I don't think it would affect things too much would it? Aren't the RMD's incredibly low?

radiowave
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Re: 65 and 63 year old - retirement question (non-investment)

Post by radiowave » Sat Oct 29, 2016 1:33 pm

You may want to do a quick calculation of recasting the mortgage vs. refinancing. Recasting lowers the monthly payment without the finance charges and save on interests costs on the back end. Of course with recasting, the overall interest rate remains the same.
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defscott627
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Re: 65 and 63 year old - retirement question (non-investment)

Post by defscott627 » Sat Oct 29, 2016 2:04 pm

I left a message on the mortgage broker's answering machine (of their current mortgage) to see what recasting would cost. Interesting option.

I like the fact that they could technically recast next year and maybe save more money in their checkings/savings and not take out as much from their 401k for the $100k that they're going to send to the mortgage.

curmudgeon
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Re: 65 and 63 year old - retirement question (non-investment)

Post by curmudgeon » Sat Oct 29, 2016 2:16 pm

A few thoughts:

1) Drawing $50K out of retirement accounts, if it is traditional IRA/401K, will generate a significant bump in income taxes if withdrawn in one year. It may not be huge, but is worth figuring out. If it were coming from Roth, that would be less of an issue.

2) Another option might be to take more (80K?) from checking/savings, and treat the retirement accounts as the emergency fund. This avoids the tax hit from option one, but gets to nearly the same place on the refi.

3) A reverse mortgage is also an option, but I don't really think it is appropriate in this case. Because there would be a significant starting balance (paying off the old mortgage), they would start accruing interest/fees immediately, and would lose a lot of potential flexibility in the future if they needed their equity for assisted living or something like that.

Some various thoughts in addition. Since they have been there for 40 years and still have a large mortgage, they must have done refi's in the past for various reasons. I think this one generally makes sense, but it needs to be viewed in the overall context of their finances. Staying in a long-time home is often a good choice, but it is good to have an eye out on how things might look 10 or 20 years from now; could stairs become a major challenge (and are there ways to work around if they do)? What about services, maintenance, shopping, property tax trends?

Overall it sounds like a good idea to me. Saving 1.25% on the interest rate and smoothing out the cash flow of the payments across the longer period has value. The exact amount to pay down vs refi could be adjusted.

delamer
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Re: 65 and 63 year old - retirement question (non-investment

Post by delamer » Sat Oct 29, 2016 2:35 pm

defscott627 wrote:
delamer wrote:I know you emphasized everything being covered by the $3500/month (except food), but does it include federal, state, and local taxes? I realize that that these may be quite low, but maybe not zero.

Also, have you taken into account any RMD's that may be required from your father's retirement accounts shortly after he stops working?


It should include the federal/state/local taxes that they may pay (with all their deductions from taxes, mortgage etc.) I haven't thought about the RMD's - but even if he had to withdraw and put it into a CD or savings account, I don't think it would affect things too much would it? Aren't the RMD's incredibly low?


I was thinking about the RMD in terms of being taxable income, and so possibly increasing their income tax bill. If I interpreted the IRS table correctly, the RMD on a $300,000 IRA balance for a 70-year-old is almost $11,000. You are right that your parents wouldn't have to spend any of the RMD.

Also, have they taken into account incomes taxes due on any withdrawals that they make from retirement accounts in order to net the $50,000 for the mortgage reduction? They might have to withdraw $60,000 or more to net $50,000.

To your broader question, my biggest concern would be if one of your parents needed some kind of long-term care or had high medical bills. Taking $100,000 out to pay down the mortgage would reduce their savings by more than 20%, and leave not a lot in the event of a catastrophic problem. You might want to research the ins-and-outs of Medicaid in their area, and how their income and home might be affected if one of them was living independently and one was institutionalized. While this scenario doesn't have a high probability, it is better to be aware of the potential impact so you can consider it in your decision-making.

It sounds like your parents have significant excess monthly income now (while your father is still working). If they took money from retirement and/or savings to reduce their mortgage, do they have the self-discipline to use that excess to replenish their savings before he retires? That would be best if they decide to go through with their plan.

defscott627
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Re: 65 and 63 year old - retirement question (non-investment)

Post by defscott627 » Sat Oct 29, 2016 2:51 pm

curmudgeon wrote:A few thoughts:

Some various thoughts in addition. Since they have been there for 40 years and still have a large mortgage, they must have done refi's in the past for various reasons. I think this one generally makes sense, but it needs to be viewed in the overall context of their finances. Staying in a long-time home is often a good choice, but it is good to have an eye out on how things might look 10 or 20 years from now; could stairs become a major challenge (and are there ways to work around if they do)? What about services, maintenance, shopping, property tax trends?

Overall it sounds like a good idea to me. Saving 1.25% on the interest rate and smoothing out the cash flow of the payments across the longer period has value. The exact amount to pay down vs refi could be adjusted.


They did remortgage before because of a job loss that left my dad out of a job for two years back when he was in his upper 50s. That set them back considerably at the time. In terms of stairs and everything else, the house can be made handicap accessible - other neighbors on the block have done that through ramps/stair lifts, etc. If that is something we decide not to do, they could always sell when/if that becomes a big enough problem. Over the longer term, I would expect the house to go from 750k to maybe closer to 900k or 1 million due to its proximity to the city, excellent school district, and nice neighborhood. Of course all of that could change so I'm just speculating, but NYC seems to be getting more and more expensive.

defscott627
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Re: 65 and 63 year old - retirement question (non-investment

Post by defscott627 » Sat Oct 29, 2016 2:56 pm

delamer wrote:
defscott627 wrote:
delamer wrote:I know you emphasized everything being covered by the $3500/month (except food), but does it include federal, state, and local taxes? I realize that that these may be quite low, but maybe not zero.

Also, have you taken into account any RMD's that may be required from your father's retirement accounts shortly after he stops working?


It should include the federal/state/local taxes that they may pay (with all their deductions from taxes, mortgage etc.) I haven't thought about the RMD's - but even if he had to withdraw and put it into a CD or savings account, I don't think it would affect things too much would it? Aren't the RMD's incredibly low?


I was thinking about the RMD in terms of being taxable income, and so possibly increasing their income tax bill. If I interpreted the IRS table correctly, the RMD on a $300,000 IRA balance for a 70-year-old is almost $11,000. You are right that your parents wouldn't have to spend any of the RMD.

Also, have they taken into account incomes taxes due on any withdrawals that they make from retirement accounts in order to net the $50,000 for the mortgage reduction? They might have to withdraw $60,000 or more to net $50,000.

To your broader question, my biggest concern would be if one of your parents needed some kind of long-term care or had high medical bills. Taking $100,000 out to pay down the mortgage would reduce their savings by more than 20%, and leave not a lot in the event of a catastrophic problem. You might want to research the ins-and-outs of Medicaid in their area, and how their income and home might be affected if one of them was living independently and one was institutionalized. While this scenario doesn't have a high probability, it is better to be aware of the potential impact so you can consider it in your decision-making. I have to ask them what their long-term care policies cover and for how long - I've heard of people entrusting some of their assets so that they cannot be touched if they have to go into a nursing home or some type of institution? I don't know much about that stuff, so I will have to look at that over the years. My brother and I do well for ourselves (my brother considerably more so), so in the event of a catastrophe, we would help out what we could. We are not looking for any type of inheritance so we are not interested in making sure money is left over in the end. If it is, fine, but that is not in the calculation.

It sounds like your parents have significant excess monthly income now (while your father is still working). If they took money from retirement and/or savings to reduce their mortgage, do they have the self-discipline to use that excess to replenish their savings before he retires? That would be best if they decide to go through with their plan. I am going to put them on a very strict plan with automatic transfers to savings, etc, so I will make sure that all of that is taken care of. The one thing I am looking at now is the idea of recasting the mortgage. If we can recast the mortgage to 104k at their current interest rate - even though the interest rate is higher, if the monthly amount is not significantly different from the lower interest rate, they could recast 12 months from now and save another 30k towards the 100k and take out even less from the 401k's.

delamer
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Re: 65 and 63 year old - retirement question (non-investment

Post by delamer » Sat Oct 29, 2016 3:05 pm

defscott627 wrote:
delamer wrote:
defscott627 wrote:
delamer wrote:I know you emphasized everything being covered by the $3500/month (except food), but does it include federal, state, and local taxes? I realize that that these may be quite low, but maybe not zero.

Also, have you taken into account any RMD's that may be required from your father's retirement accounts shortly after he stops working?


It should include the federal/state/local taxes that they may pay (with all their deductions from taxes, mortgage etc.) I haven't thought about the RMD's - but even if he had to withdraw and put it into a CD or savings account, I don't think it would affect things too much would it? Aren't the RMD's incredibly low?


I was thinking about the RMD in terms of being taxable income, and so possibly increasing their income tax bill. If I interpreted the IRS table correctly, the RMD on a $300,000 IRA balance for a 70-year-old is almost $11,000. You are right that your parents wouldn't have to spend any of the RMD.

Also, have they taken into account incomes taxes due on any withdrawals that they make from retirement accounts in order to net the $50,000 for the mortgage reduction? They might have to withdraw $60,000 or more to net $50,000.

To your broader question, my biggest concern would be if one of your parents needed some kind of long-term care or had high medical bills. Taking $100,000 out to pay down the mortgage would reduce their savings by more than 20%, and leave not a lot in the event of a catastrophic problem. You might want to research the ins-and-outs of Medicaid in their area, and how their income and home might be affected if one of them was living independently and one was institutionalized. While this scenario doesn't have a high probability, it is better to be aware of the potential impact so you can consider it in your decision-making. I have to ask them what their long-term care policies cover and for how long - I've heard of people entrusting some of their assets so that they cannot be touched if they have to go into a nursing home or some type of institution? I don't know much about that stuff, so I will have to look at that over the years. My brother and I do well for ourselves (my brother considerably more so), so in the event of a catastrophe, we would help out what we could. We are not looking for any type of inheritance so we are not interested in making sure money is left over in the end. If it is, fine, but that is not in the calculation.

It sounds like your parents have significant excess monthly income now (while your father is still working). If they took money from retirement and/or savings to reduce their mortgage, do they have the self-discipline to use that excess to replenish their savings before he retires? That would be best if they decide to go through with their plan. I am going to put them on a very strict plan with automatic transfers to savings, etc, so I will make sure that all of that is taken care of. The one thing I am looking at now is the idea of recasting the mortgage. If we can recast the mortgage to 104k at their current interest rate - even though the interest rate is higher, if the monthly amount is not significantly different from the lower interest rate, they could recast 12 months from now and save another 30k towards the 100k and take out even less from the 401k's.


My mother lived in a good-quality nursing home for the last several months of her life. The cost was over $12,000 per month, and that was in an area with a medium cost-of-living (unlike the NYC area). So whatever your good intentions, help from you and your brother may not be enough. Again, an extended period of nursing home care is not likely, but it needs to be considered.

Good luck, and it is admirable that you are trying to help your parents get their financial ducks in a row. I am the same age as your mother and I am the one trying to get my kids on track!

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Runaway
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Re: 65 and 63 year old - retirement question (non-investment)

Post by Runaway » Sat Oct 29, 2016 3:55 pm

My dad is planning on continuing to work until 70 so he can collect his full SS benefit



He would most likely get close to the same amount even if he stops working now and delays applying for Social Security until he is 70. It's based on something like the top 35 years of earnings so continuing to work doesn't always increase the amount. If he wants/needs to work for the income from the job that's understandable to many. If he wants to delay filing Social Security until 70 to maximize the benefit and possible widow benefits that's why most do it. Social Security can be full of surprises so hopefully someone is talking to the local office or doing some research.

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celia
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Re: 65 and 63 year old - retirement question (non-investment)

Post by celia » Sat Oct 29, 2016 4:02 pm

defscott627 wrote:Age: 65 (Him) and 62 (Her)
Income: $70K (Him)
$10K (Her, part-time)
$12K (Her, Social Security)
$8K (Him starting January 3, 2017 when he turns 66. This is the Social Security spousal benefit only - he is delaying until 70)

I'm sorry to inform you the rules for filing for SS spousal benefits changed last year. When he files, they will automatically give him the higher of his spousal benefit or his own benefit. Once he starts collecting, it will no longer grow 8% for each year he waits (since he is no longer waiting). Since he will be working until age 70, he should start it then.

If he starts now, it is likely 85% of it will be taxed. But if SS and RMDs are their only income after age 70, not much of it will be taxed, if any.

If your mother already started SS, is she aware that her benefit is being reduced since she is collecting while still working? However, in her case, any reductions due to working at the same time as collecting will be returned to her when she reaches FRA in the form of slightly higher monthly benefits than if she had started collecting at FRA.

Cash Accounts: $90K in Checkings/Savings
Retirement Accounts: $350K (25/75 allocation approximately - not too heavy in stock).
Debt: $204,000 at 4.5% interest on their house (House is worth approximately 750K in Queens, NY). The mortgage is currently $1,140 a month.

If they withdraw from the retirement account, that money will be fully taxed (as any RMDs would be). I think they should hold onto their checking/savings so they have a mix of taxable and tax-deferred (retirement) accounts to choose from to pay unforeseen expenses. But it might make sense to refinance to lower the monthly payment. How many months do they have left?

It is good that you are posting though, since you are not yet familiar with what the taxes will do to their situation. It is much better to understand their options now than to find out after they figure our their 2017 tax bill. In fact, if you use tax software, I encouage you to run any proposed 2017 and age 71 tax situations through it to confirm what their taxes might be.

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Re: 65 and 63 year old - retirement question (non-investment)

Post by 22twain » Sat Oct 29, 2016 6:17 pm

celia wrote:
defscott627 wrote: $8K (Him starting January 3, 2017 when he turns 66. This is the Social Security spousal benefit only - he is delaying until 70)

I'm sorry to inform you the rules for filing for SS spousal benefits changed last year.


A "restricted application" for spousal SS while delaying one's own SS is still possible, for people who reached age 62 before January 1, 2016. So he can still do it, unlike me, whose 62nd birthday missed the deadline by a few days. :annoyed

defscott627
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Re: 65 and 63 year old - retirement question (non-investment)

Post by defscott627 » Sun Oct 30, 2016 9:09 am

celia wrote:
defscott627 wrote:Age: 65 (Him) and 62 (Her)
Income: $70K (Him)
$10K (Her, part-time)
$12K (Her, Social Security)
$8K (Him starting January 3, 2017 when he turns 66. This is the Social Security spousal benefit only - he is delaying until 70)

I'm sorry to inform you the rules for filing for SS spousal benefits changed last year. When he files, they will automatically give him the higher of his spousal benefit or his own benefit. Once he starts collecting, it will no longer grow 8% for each year he waits (since he is no longer waiting). Since he will be working until age 70, he should start it then. Hi Celia--- this actually is not accurate. My parents are born before January 2, 1954 so they are still entitled to the restricted application for spousal benefits (my dad has already done this and spoken to Social Security). So he is collecting $644 and will collect $3047 when he turns 70 as he is foregoing his own benefit until then.

If he starts now, it is likely 85% of it will be taxed. But if SS and RMDs are their only income after age 70, not much of it will be taxed, if any.

If your mother already started SS, is she aware that her benefit is being reduced since she is collecting while still working? However, in her case, any reductions due to working at the same time as collecting will be returned to her when she reaches FRA in the form of slightly higher monthly benefits than if she had started collecting at FRA. My mother's benefits are not reduced because she makes under the yearly amount that SS allows. They are reduced because she started at age 62, however.

Cash Accounts: $90K in Checkings/Savings
Retirement Accounts: $350K (25/75 allocation approximately - not too heavy in stock).
Debt: $204,000 at 4.5% interest on their house (House is worth approximately 750K in Queens, NY). The mortgage is currently $1,140 a month.

If they withdraw from the retirement account, that money will be fully taxed (as any RMDs would be). I think they should hold onto their checking/savings so they have a mix of taxable and tax-deferred (retirement) accounts to choose from to pay unforeseen expenses. But it might make sense to refinance to lower the monthly payment. How many months do they have left?They have 26 years left LOL - they refinanced a few years ago but their rate was locked in at 4.5%. They're trying to lower that $1,140 payment.

It is good that you are posting though, since you are not yet familiar with what the taxes will do to their situation. It is much better to understand their options now than to find out after they figure our their 2017 tax bill. In fact, if you use tax software, I encouage you to run any proposed 2017 and age 71 tax situations through it to confirm what their taxes might be.

defscott627
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Re: 65 and 63 year old - retirement question (non-investment

Post by defscott627 » Sun Oct 30, 2016 9:12 am

delamer wrote:
defscott627 wrote:
delamer wrote:
defscott627 wrote:
delamer wrote:
My mother lived in a good-quality nursing home for the last several months of her life. The cost was over $12,000 per month, and that was in an area with a medium cost-of-living (unlike the NYC area). So whatever your good intentions, help from you and your brother may not be enough. Again, an extended period of nursing home care is not likely, but it needs to be considered.

Good luck, and it is admirable that you are trying to help your parents get their financial ducks in a row. I am the same age as your mother and I am the one trying to get my kids on track!


Totally - I do well for myself, but as I said, my brother does very well for himself (an 8-figure portfolio - he is the Chief Marketing Officer of a very very large publicly traded company in Manhattan). He has said he will help them if they were to, God forbid, need any type of nursing home care, though his help has stopped there (hasn't really helped me in figuring out their finances in retirement - frankly, I'm not convinced he knows that much about personal finance - he is just an extremely high income earner and very business savvy in the corporate world).

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Re: 65 and 63 year old - retirement question (non-investment)

Post by SuzBanyan » Sun Oct 30, 2016 9:47 am

Can your parents pay more towards their mortgage before your Dad stops working?

Their income starting in January is $100K and their expenses are $42K plus food. While refinancing to a lower rate may make sense, this is particularly true when it allows earlier repayment of the debt. If they do a non-fee refinance after paying the balance to $90K and make $1700 per month payments while your Dad continues to work, the mortgage would be paid in full in about 4.5 years. Your Dad's spousal SS could be used for the additional amount. A reserve mortgage might then make sense to allow them to tap their home equity for long term care.

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Re: 65 and 63 year old - retirement question (non-investment)

Post by Wagnerjb » Sun Oct 30, 2016 10:40 am

SuzBanyan wrote:Can your parents pay more towards their mortgage before your Dad stops working?

Their income starting in January is $100K and their expenses are $42K plus food.


I had the exact same thoughts. Where is their current excess income going? This is a pretty important question to understand in their financial situation.

Best wishes.
Andy

defscott627
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Re: 65 and 63 year old - retirement question (non-investment)

Post by defscott627 » Sun Oct 30, 2016 12:50 pm

Wagnerjb wrote:
SuzBanyan wrote:Can your parents pay more towards their mortgage before your Dad stops working?

Their income starting in January is $100K and their expenses are $42K plus food.


I had the exact same thoughts. Where is their current excess income going? This is a pretty important question to understand in their financial situation.

Best wishes.


It's 100k in income but that's gross. The 42k in expenses plus food would be from their net. My dad's 70k income I would estimate nets about 35k when you account for his 401k contributions and taxes. So I would say they net approximately 60-65k for the year.

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celia
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Re: 65 and 63 year old - retirement question (non-investment)

Post by celia » Mon Oct 31, 2016 12:22 am

I'm glad you got the SS down in more detail than I did. I only know generalities about it but what you replied makes sense.

defscott627 wrote:It's 100k in income but that's gross. The 42k in expenses plus food would be from their net. My dad's 70k income I would estimate nets about 35k when you account for his 401k contributions and taxes. So I would say they net approximately 60-65k for the year.

Instead of withhrawing $50k from the 401k, consider not making any more contributions and apply the money to extra mortgage payments instead. The withdrawal would all be taxable in the year withdrawn, whereas the 401k contributions payments to the mortgage (on top of the current or re-fi payments) will be taxed in the year earned. This will spread the tax hit over several years instead of all at once which might push them into a higher tax bracket.

However, you need to consider employer contributions in both cases. Will a $50k withdrawal impact employer contributions? I know they will stop, if he stops his. However, also consider the rate of growth on the 401k and the rate on the mortgage.

It would be best if you could run both scenarios through tax software since the one-time $50k withdrawal all at once could push them into a higher tax bracket whereas diverting the 401k contributions to the mortgage will increase the taxes slightly for several years.

(A possible third option is to contribute just enough to get the employer contribution and divert the rest of the contribution towards extra mortgage payments.)

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celia
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Re: 65 and 63 year old - retirement question (non-investment)

Post by celia » Mon Oct 31, 2016 1:00 am

defscott627 wrote:
celia wrote:How many months do they have left?
They have 26 years left LOL - they refinanced a few years ago but their rate was locked in at 4.5%. They're trying to lower that $1,140 payment.

Yikes! At the rate they're going, they would have to pay out:
$1,140 * 12 months * 26 years = $355,680 to pay off that $204,000 remaining loan. I think the problem is that they started over with a 30 year loan instead of 10 years or so. When they started a new loan, weren't they thinking of retiring some day? I suggest that the next loan be for 10 years (to keep the minum payment lower) but pay it off in 5.

In the worst case, if they paid off 100k now, a $104k loan at 3.5% for 10 years would have a payment of $1,028 (for a total cost of $123,360). If they paid off $104k at 3.5% for 5 years, the payment would be $1,892 (for a total cost of $113,520)

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