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Hanging up the keys!
Old 06-15-2014, 09:42 AM   #1
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Hanging up the keys!

I am retiring as a FedEx driver at the end of November and turning 60 years old. No more insanely busy Christmas peak seasons to go through! I will be my own financial investor with Bogle and Bernstein as my foundation educational guides. Here is my tentative scenario and one slight dilemma. Both have a 100% success rate according to FIRECalc.
Expense needs annually:
$45000 with mortgage
$36000 without mortgage

Income annually:
Pension $25100 no COLA
Current 401k $515000 (contribute $600 per month until Dec 1, 2014)

Dilemma:
I will have $44000 left to owe on my home by the time I retire. Do I take it out of my 401k and pay the mortgage off?
Cons:
One time higher tax bracket
Less $44000 to grow in 401k
Also, less liquid money for emergencies

Pros:
No more mortgage payments and debt free
Lower taxes paid after 1st year in retirement

Is there a big mistake I'm missing here by taking a relatively small lump sum to pay off my mortgage at retirement?
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Old 06-15-2014, 09:56 AM   #2
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Congratulations. I am sure you will enjoy your retirement. I imagine that the reality of it will hit in December when you see all those FedEx trucks racing about town and you will suddenly think 'Hey, I can sit back, have another cup of coffee and finish the morning paper.' Not bad!

As far as your mortgage goes, the key question is what is your interest rate? Another question is "Can you still deduct the interest payments?". $44,000 is not that much these days (Amazing but true) and the interest may not totally deductible.
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Old 06-15-2014, 09:57 AM   #3
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FedEx, your question on paying off the mortgage early is the forum equivalent of asking which came first, the chicken or the egg. The answer is largely a matter of personal preference.

I am in the pay it off early camp, but I would not advocate withdrawing a lump sum and placing yourself in a higher tax bracket to do so. Perhaps a better approach would be to withdraw and pay as much additional principal as you can each year while keeping yourself in the lower bracket.
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Old 06-15-2014, 09:59 AM   #4
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If it were me, I would not pay off the motgage early. Instead, I would increase my monthly withdral rate to cover the motgage. That way you are still allowing the $44k to work for you AND avoiding the larger tax hit from a one-time withdrawl.

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Old 06-15-2014, 10:01 AM   #5
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Besides the mortgage thoughts, what about health insurance? You are 5 years away from Medicare and there needs to be coverage for that period. Cobra is pretty expensive and only lasts 18 months.
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Old 06-15-2014, 10:22 AM   #6
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Thanks to all the quick replies!
Mortgage interest rate is 4.85%apr
Company health ins. for retirees is $450 a month and rises each year (already factored into budget)
At retirement will only have 3 years and 9 months left on mortgage so not much interest to deduct thus not long for payoff anyway.
I've been looking at that $44000 as the glass half full but if we have a really bad market correction and the glass is half empty then.....
I did recently move investments around in 401k to a more 70/30 mix with the 30% being cash and bonds giving me 10years of " safer" money.
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Old 06-15-2014, 11:19 AM   #7
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I went through this exercise this week. I have a small inherited IRA that is part of my retirement nest egg that I planned to use to pay down the mortgage. I owed $31k on my mortgage. I gave notice last week.

I went and looked at our taxes last year (2013) - and realized we were *barely* out of standard deduction range last year. I did a rough calc to confirm that this year we would NOT get any benefit from a mortgage interest deduction because we will be be firmly in the standard deduction range. I also looked at my income from this year - and realized that I would not be able to be in the 15% bracket for 2014... but that pulling money out to pay off my mortgage would not push me above my current bracket. With all that - I decided to pay it off.

Also factoring into the decision was the idea that next year, 2015, we should have income low enough to qualify for ACA subsidies. If I still had a mortgage, I'm not sure that would be the case. For a family of 4 even the lowest level of subsidy will save me a lot of money - close to $6k/year. So... that was the final factor for me.

Edited to add: Every case is different. Do the math and see what the best financial move for you, is.
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Old 06-15-2014, 12:04 PM   #8
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Use Turbotax to model what if scenarios. I doubt it makes a big difference if you pay off the mortgage or not. However, I wouldn't pay it off this year since you have higher income that you will in the future.
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Old 06-15-2014, 12:14 PM   #9
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Quote:
Originally Posted by walkinwood View Post
Use Turbotax to model what if scenarios. I doubt it makes a big difference if you pay off the mortgage or not. However, I wouldn't pay it off this year since you have higher income that you will in the future.
Thanks, I am going to plug in the numbers to Turbo Tax and see what ifs.
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Old 06-15-2014, 12:54 PM   #10
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Given that you have less than four years to go and the interest rate is just a touch high I like the idea of paying off the mortgage. You don't want to "gamble" the mortgage principal on the next four years of the market doing better than 5%. And there is no way to reserve cash now to pay it off and make anything like 5% on that cash. You have a nice medium-term investment you can make here.

On the other hand, there is a clear cost to taking the whole amount now from the 401k. You never get to put that money back in, and the lump sum may incur extra taxes.

Is the mortgage essentially being paid from the 401k either way (monthly payments or lump sum)? If the mortgage money comes out of the 401k over four years anyway, then the question is just one of timing. I'd pull whatever you can from the 401k this year and still stay within your current tax bracket. Same thing next year. Saving 5% interest on the mortgage does nothing for you if you pay 10% extra to Uncle Sam in order to do it. Hopefully that gets you paid off this year or next.

I'd do some further calcs if this is something you could cover with just the pension by making the monthly payments.

Edited to add: +1 to walkinwood, if your tax rate is higher this year it may make sense to wait until next year to start paying it off.
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Old 06-15-2014, 03:23 PM   #11
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Originally Posted by Animorph View Post
Given that you have less than four years to go and the interest rate is just a touch high I like the idea of paying off the mortgage. You don't want to "gamble" the mortgage principal on the next four years of the market doing better than 5%. And there is no way to reserve cash now to pay it off and make anything like 5% on that cash. You have a nice medium-term investment you can make here.

On the other hand, there is a clear cost to taking the whole amount now from the 401k. You never get to put that money back in, and the lump sum may incur extra taxes.

Is the mortgage essentially being paid from the 401k either way (monthly payments or lump sum)? If the mortgage money comes out of the 401k over four years anyway, then the question is just one of timing. I'd pull whatever you can from the 401k this year and still stay within your current tax bracket. Same thing next year. Saving 5% interest on the mortgage does nothing for you if you pay 10% extra to Uncle Sam in order to do it. Hopefully that gets you paid off this year or next.

I'd do some further calcs if this is something you could cover with just the pension by making the monthly payments.

Edited to add: +1 to walkinwood, if your tax rate is higher this year it may make sense to wait until next year to start paying it off.

+1
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Old 06-15-2014, 03:30 PM   #12
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Congrats on leaving FedEX!! I was a driver for 5 years in the early 2000's and believe me I know those peak seasons and P1 deliveries.

I can only imagine how happy your managers were when you said you weren't staying for this year's peak. I love it.

Enjoy every minute of your retirement!
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taxes
Old 06-15-2014, 07:56 PM   #13
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taxes

(1) That near the end of your mortgage, you are paying almost all principal in each payment so early payoff will not save much on interest.

(2) As mentioned by others, during the remainder of this year, don't withdraw from your tax sheltered retirement accounts, because that pumps up your taxable income. Consider stopping the $600 monthly 401k contribution to give you more cash for the last few house payments this year.

(3) VERY IMPORTANT In your retirement account, shift the entire mortgage payoff amount into a stable value fund very soon. Only money that you don't need for the next 10 years should be exposed to the risks of the stock market, and bonds should be somewhat short term due to their current risk of rates going up. You are taking the mortgage money out of the market, but not out of your account 'cause it would be taxed at a higher rate. That money will no longer grow, nor shrink, but neither does your mortgage, so that is the right match for those two.

If you are single, your $25K pension will put you into the 15% tax bracket by $6K. See how saving 4.85% on a small amount of mortgage interest by paying 15% income tax on a big 401k withdrawal is not advantageous. You do only pay the 15% tax on any retirement income over $19.2K.

Having spent 30 years in the dark colored vans with the yellow emblems, retirement has been the best years of my life. I wish the same joy to you.
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Old 06-15-2014, 10:15 PM   #14
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Thanks so much. Ya'll have given me a lot of great advice that will go a long way in finalizing retirement plans! I know I will make a few mistakes along my path but I hope to keep them from being catastrophic.
To you fellow couriers out there.....I can't wait to be able to drive without a care in the world or what time I get there.
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Old 06-18-2014, 05:53 AM   #15
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Hi Fed,
The Mortgage Professor has some questions/answers that might be of interest:
Mortgage Prepayment (Paying Off Early) - The Mortgage Professor
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