“I am investing in my employer’s 401(k) retirement plan, which currently totals $1.6 million.” (Photo subject is a model.) - Getty Images/iStockphoto
Dear Quentin,
I am 59 and married. My employment with the federal government spans 31 years, and I earn an annual salary of $116,000. My wife’s annual income is about $55,000. I am contemplating retirement within the next four years, and my wife, who is 57, may retire after I do.
My wife and I own homes in both New York City and Pennsylvania. Our New York home does not have a mortgage and is a multifamily dwelling. The property taxes for this home are $6,700, and the homeowners insurance costs $1,700 annually. My wife and I occupy one unit, and the second unit is rented, producing a monthly rental income of $1,800.
Additionally, the basement section of the unit that my wife and I occupy produces variable rental income of about $15,000 per year through the short-term-rental service Airbnb. The federal agency where I am employed is also located in New York City. We bought a second home in Pennsylvania less than two years ago. It has a 30-year mortgage of $484,000 at 6.2%, property taxes of $6,500 and annual homeowners insurance of $1,200.
My wife and I own a nine-year-old car. We also obtained full-coverage auto insurance in Pennsylvania for $1,200 per year, which is significantly less than the cost in New York City. I have one credit card, with an average monthly balance between $1,200 and $1,500, which I pay in full every month. My employer provides a commuting subsidy. I eat breakfast at home and take my lunch to work. I am not an impulse shopper.
Rarely dine out
My wife and I seldom dine out, typically only on special occasions such as birthdays, Valentine’s Day, Mother’s Day and our wedding anniversary. The initial purpose of acquiring the home in Pennsylvania was the favorable state tax treatment of my federal pension. However, I am not certain whether I exercised sufficient prudence in making this additional homeownership investment with such a short window before retirement.
I am investing in my employer’s 401(k) retirement plan (Thrift Savings Plan), which currently totals $1.6 million. For several years, I have been contributing 30% of my annual salary (including the maximum catch-up contribution each year) to the plan. My investment allocation in the 401(k) plan is 90% in equities and 10% in a time-targeted fund.
My projected monthly pension at age 62 is $3,589 with no survivor benefit, or $3,230 with a survivor benefit. My projected monthly Social Security benefit at age 62 is $2,400. I am allowed to carry my health insurance (which currently costs $548 per month) into retirement for both my wife and myself, until we become eligible for Medicare, at the same yearly rates paid by federal employees.
The one major financial resource conspicuously missing from my finances is liquidity, or a cash buffer. I do not have the recommended six to 12 months’ worth of emergency cash reserves. Consequently, I am contemplating putting the second home on the market in order to provide ourselves with the needed emergency-cash buffer.
I find myself at a crossroads: carrying a high mortgage debt that exposes us to significant financial risk, or improving our liquidity so we can better weather a major financial event during retirement. Your help would be greatly appreciated.
The rule of thumb when buying or selling property is to wait five years to cover your closing costs, which can be considerable. - MarketWatch illustration
Dear Husband,
You rarely dine out, but you are making a mortgage payment of roughly $3,600 every month, including interest, property taxes and insurance. This makes sense if you will get that money back with either an increase in the property’s value — or rent. When the 30-year mortgage is paid off, you’ll be 89, but you’re probably not banking on holding on to the property for that long if you’re already having second thoughts about the purchase.
The rule of thumb when buying or selling property is to wait five years to cover your closing costs, which can be considerable. Let’s say you sell the home for $650,000. That profit will mostly be wiped out with 6% realtor commission ($39,000), 1% state taxes ($6,500), title fees and lawyer fees (roughly $1,000 and $3,000, respectively). That’s nearly $50,000 before you even pay a moving service.
You don’t say whether you bought the property as a holiday home so you can get out of the city (which seems the most likely) or to rent. But I suggest doing the latter, given the expenses, and the fact that you are gearing up for retirement by the time you’re 65 and qualify for Medicare (which comes with its own set of expenses). Renting this property, if you can cover the monthly bills, buys you time to make a decision about when to sell.
The Pennsylvania home carries a substantial mortgage. With such a short window until your retirement, it’s a big expense, especially if the property is not generating any rent. For that reason, holding on to it during early retirement could put a strain on your cash flow, particularly if you have other unexpected expenses or there’s a dip in the market in your early retirement years. You don’t want to be forced into making withdrawals from your retirement account before you must start taking required minimum distributions.
Longevity and survivor benefits
For an extra $400 a month, I’m not sure it’s worth taking the pension without a survivor benefit. It’s obviously a gamble, given that we don’t know if you will survive your wife or if she will outlive you. So much of our longevity depends on a variety of factors, including genes (with how long your parents lived being a blunt instrument for making a prediction). You are two years older than your wife, and women tend to outlive men by around five to six years. But anything can happen. It’s a tricky risk assessment.
You’re in good shape for retirement, regardless. By the time you turn 62, your 401(k) could be worth close to $2.1 million. At a 4% rate of withdrawal, that would give you more than $83,800 a year while helping sustain your retirement fund, assuming a 7% annual return (or 5% after inflation). Add to that your $40,000-a-year pension, $28,800 in Social Security (which you could delay claiming to raise your monthly benefit amount) and $20,400 in net rent, and you have a very tidy $176,000 income in retirement, not counting whatever your wife brings in.
If you absolutely love the time you spend at your Pennsylvania property and it significantly improves your quality of life, hang on to it at least until you retire. Then weigh whether you want to keep spending $3,600 a month on this property. Chances are, if you hang onto it long enough, you’ll make your money back, with perhaps a little extra. Property prices in that state are seeing annual increases of 5%, though some might say that’s optimistic.
You’ve done a lot right: You invested from an early age to reach $2 million in your 401(k) by retirement, and you pay off your credit cards every month. Paying double-digit credit-card interest rates is one of the worst ways to give away your money. But if your reason for having this second home is better tax treatment for your pension and more favorable car insurance rates, it’s probably not going to be worth it in the long run, unless you get very lucky with the property market there.
Still, you’ve made good choices. Here’s to your retirement!
