Taking a mortgage near retirement

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beagle1
Posts: 137
Joined: Sat Oct 02, 2010 3:09 pm

Taking a mortgage near retirement

Post by beagle1 »

I posted this last week but didn't quite lay it out correctly. And I've done some more homework to present a complete picture. Based on what we have now, we're checking to see if taking on a mortgage is doable in our situation. I feel comfortable generally but would love another set(s) of eyes on this plan.

We are 54 and 58 years old, buying a house in southern California a mile from the beach in a good neighborhood. We're in a small condo and would like to live in a house with a yard. It also has a back house (ADU) that is rentable, at roughly $2k/month. We’ve consulted with a retirement advisor (Planvision, which we discovered through Bogleheads) who thinks we’re fine but I’d love to get more feedback on what to expect.

Here’s the loan we are taking on and our plan going forward:

- Loan/RE Taxes/Insurance cost: We are initially taking out a loan of $925,000 that will be recast to $525,000 in July/August after our current property is sold. Loan is 4.875%. With the recast, monthly mortgage will be $2805 + $1350 in property taxes + $150 in insurance. Total cost is $4333/month after the recast.

- Current cash flow: From our current earnings and expenses, we have roughly $7.5k in cash flow at present to pay for the mortgage and bank money. That means, after paying the loan/RE tax/insurance, we'd save $3.2k each month . We do have the opportunity to increase income.

- Assets after purchase:

After the purchase, we will have $2 million in investment assets.

We also have a rental property worth $550k (with a mortgage of 130k) that has a slight negative cash flow (3K/year). We plan to sell the property to pay down or recast the loan a second time. The basis for this property is roughly 300k, meaning that we’d pay cap gains on $250k. That could easily drop another 300K to pay down the mortgage to $225k. We're waiting to sell because we've already sold another rental that has a substantial cap gain this year.

We also will have roughly 50K in an emergency fund after the purchase.

- Ending 401k contributions: We are stopping 401k contributions to have the cash flow stated above. We feel comfortable that $2 million is substantial enough to fund our retirement. We will reevaluate in a year (have already made five months of contributions this year) based on cash flow.

- Retirement: We plan to work roughly 3.5-5 more years, but may continue to do limited teaching and consulting work that we enjoy in retirement. I could see us generating 25k-50k a year for the initial years of retirement pretty easily.

- Pension and health benefits in retirement: My wife will receive a pension of roughly $72k upon retirement. We also will have full healthcare benefits in retirement and to supplement Medicare.

- Potential for rental income: We did not factor in any rental income on the new property into our cash flow. even though it has a back house that could be used that way. We may rent that periodically (visiting nurses) but don't want to include it as reliable income. But it could potentially flow $

Does this seem reasonable? The retirement software we use with our retirement advisor shows some negative cash flow upon retirement, but the assets continue to grow every year. That's why our advisor thinks we're fine.

Any thoughts greatly appreciated!
bloom2708
Posts: 9855
Joined: Wed Apr 02, 2014 2:08 pm

Re: Taking a mortgage near retirement

Post by bloom2708 »

You don't mention the purchase price of the home, but a $225k mortgage on a $1.5 million home (guessing) seems very reasonable.

I might be inclined to not make this decision so close to retirement and lock into a specific area.

But 3 to 4 years more working can seem like a long time at the end of the working career.

The ongoing cost of a high value house would be what would the toughest to absorb. That is money I'd like to use to travel and for hobbies. It may feel tight between working and SS time if you wait until 67-70 to maximize. Probably worse right now with everything dropping and inflation roaring. Hard to guess the bottom while in these messes.

But, houses are very personal and it sounds like you have thought it through. I like the idea of selling the cash flow negative rental.

I'd tend to be quite conservative just because of the markets, inflation and rising interest rates. Good luck with your decision.
Topic Author
beagle1
Posts: 137
Joined: Sat Oct 02, 2010 3:09 pm

Re: Taking a mortgage near retirement

Post by beagle1 »

Thank you. This is helpful. The price/house value is a little higher than you listed. We do love the area and the house itself, but I do see your point. We're definitely locked in to working 3.5 years to increase my wife's pension, and to retire at roughly the same time.

I appreciate your thoughts and response!

bloom2708 wrote: Mon May 16, 2022 11:54 am You don't mention the purchase price of the home, but a $225k mortgage on a $1.5 million home (guessing) seems very reasonable.

I might be inclined to not make this decision so close to retirement and lock into a specific area.

But 3 to 4 years more working can seem like a long time at the end of the working career.

The ongoing cost of a high value house would be what would the toughest to absorb. That is money I'd like to use to travel and for hobbies. It may feel tight between working and SS time if you wait until 67-70 to maximize. Probably worse right now with everything dropping and inflation roaring. Hard to guess the bottom while in these messes.

But, houses are very personal and it sounds like you have thought it through. I like the idea of selling the cash flow negative rental.

I'd tend to be quite conservative just because of the markets, inflation and rising interest rates. Good luck with your decision.
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