Jorge and Maude own their home outright, it is valued around 1.5k. They would like to sell and move to a home selling for around 2.5k.
They are six years from retirement and socking away around $1,500 per month into their 401k, which is currently valued at about 2k. There will also be a modest pension in retirement.
What is their smartest move in financing the new home? New mortgage? If so, how many years? Tap into the 401k? Something else?
mmm
Those numbers don’t make any sense.
Most people interpret a number followed by a ‘k’ as meaning ‘thousands’. I suspect that’s not what you meant. Millions doesn’t really make that much sense either, though possible.
Maybe you should clarify the numbers you’re thinking of?
I think ‘millions’ makes sense, though the post-retirement situation would be owning a house worth 2.5 million with non-house assets of 1 million, which seems like a recipe for disaster to me unless that pension is a lot better than it sounds.
Your first step should be to determine what your annual expenses are going to be vs. your post-retirement income. A 2.5 million house is going to cost maybe 25,000 a year in property tax alone, and maybe that much again in maintenance costs. You can’t support those costs with 1 million in assets.
Doh! Sorry. I’m an idjit.
Current home: 150,000
New home: 250,000
Retirement fund: 250,000
401k: 401k
mmm
IMHO, that’s a fairly small 401(k). I think the hypothetical couple should stay put.
Or downsize from there. There is no way six years from retirement with only $250k put away they should be looking at $100k in mortgage.
Unless you’re independently wealthy, buying more in the way of a house before retirement can end up hurting you. From my age perspective, a 30 year mortgage looks like a pretty good scam, but having a house paid off gives me the opportunity to sell it or get a reverse mortgage if I need the money sometime in the future. And does Jorge or Maude want to be paying a mortgage if one or both have to go into care due to stroke, dementia, alzheimers?
And bigger houses have bigger yards…I know some people revel in gardening in their old age, but at some point it becomes too much and there you are stuck with a house you might not be able to sell. Plus taxes, upkeep, HOA fees, insurance…
And $250K 401K is not very much. Do they get social security? Have other retirements? Maybe they have other investments?
Then there is the question if you want to remain in the same city when you retire. You can get a nice house much cheaper in a rural area.
Partly, they need to look at income/expense during retirement. “Modest pension” doesn’t tell us very much, Social Security isn’t mentioned at all and we know nothing about how much they intend to spend. It could be they live frugally and retire on positive cash flow, or it could be that their pittance of a 401k is eaten up very quickly.
There are also unknowns like auto loans - are they sitting on another 50k of debt, or are their cars paid off? That makes a big difference.
But for me, the deciding factor is risk, such as the risk that one of them loses a job before retirement. If they stay in the current home, they are much more tolerant of risk than if they move and require the income just to keep up on the new debt.
When I retired, my home was paid off and worth 1/3 of my 401k.
To me, this meant I had too much invested in my house and should have more in retirement investments I could spend in the future.
Having a $250k house (with a mortgage) and a $250k 401k would scare the shit out of me.
Yes, except… Why do they want to move to the spendier house? Are there significant maintenance issues with the current place?
Is the new place actually bigger, or does it just suit their long-term needs better? Maybe better access to transit, all one level, closer to work, closer to other things that could benefit them in the long run, and so on?
All else being equal, I vote stay put - but assuming they really WANT to move: do NOT touch the 401(k). a 100,000 mortage isn’t really that large: 6% (higher than current market rates, I just picked it at random) for a 10 year mortgage yields a payment of about a thousand a month. The net cost will be lowered by the interest (though that would dwindle). The same interest and amounts for a 20 year loan brings the payment down to about 660 a month; while that costs them more in the long run it might be a better decision if they don’t want to tie up all their cash flow in the short term.
And with only 250,000 in the 401(k), they can’t afford to retire in 6 years anyway. 18,000 a year for 6 years is going to be worth about 130,000 (just a WAG assuming some growth), and 380,000 is NOT enough to retire on. They really need to find a way to tighten the belt and increase that 1500 a month.