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How do I plan for 'the worst' to allow for options?
Old 06-11-2015, 02:21 PM   #1
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How do I plan for 'the worst' to allow for options?

Hi,

I have read a bit on this forum before yet this is my first post; I hope to present my scenario well and, most notably, the central question I think about related to money and retiring most often.

I am 43 and my wife is 34. We have three young children (7,4,2) and we both teach. I can receive a pension in 8 more years that would give me just over $60,000 if I took the benefit that didn't help my wife in any way.

I fully fund my 401K and my wife puts some in hers. We fully fund ROTHs each year. These retirement accounts are in the low six-figures.

We own a duplex that cash flows approximately $975-1000/month. Our house payment is just above $1800 and we have no debt besides the duplex and house.

I don't know if I'll want to retire in eight years yet I want to create that option. Even though my wife would likely keep teaching, I'd like to create a situation where she could choose to 'retire,' too, if that is her choice at that point. We'd only be 51 and 42 so there's a good chance we might opt for part-time work at that point. No matter: my goal is to create the most flexibility and freedom for us in eight years.

I figure we either need to be rid of the house payment to make this happen or to have the duplex paid off. Or to produce $2000/month in income above my pension.

What are your thoughts and ideas? I appreciate any help.
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Old 06-11-2015, 02:35 PM   #2
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First off, welcome! Sounds like you're on the right track. Have you played around with FIRECalc: A different kind of retirement calculator ?
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Old 06-11-2015, 02:43 PM   #3
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Of all the factors, deciding whether to keep the mortgage or pay it off is one of the least meaningful. If you keep the mortgages, you'll have more investments which can produce dividends or can be drawn from to make the payments. If you pay them off, you have lower expenses but less in investments. The main factors are whether you've got the liquidity to pay them off before you hit 59.5 and can tap your retirement accounts, and comparing your mortgage rates (less tax write-off) with what kind of return you can safely get on that money if you keep it invested. Usually that's pretty close to a wash.

More important is to understand your future expenses so you can see if you will have enough. With 3 young kids that would seem like a challenge.
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Old 06-11-2015, 03:35 PM   #4
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There is a "backdoor ROTH" that you might want to look at. Your 401K has to allow it (you over contribute and then roll the excess to your ROTH) but you can push more funds into your ROTH than normally allowed. Since Roth contributions can be pulled without penalty or taxes (though in some cases after 5 years) it allows more flexibility in some cases.
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Old 06-11-2015, 03:46 PM   #5
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Welcome - and glad you are happyandhealthy! Congratulations on your savings to date on teacher's salaries, and thanks for what you and DW are doing for all those kiddos you teach!

If you haven't seen them yet, there are two excellent resources here that might help you figure out a plan:

Some Important Questions to Answer Before Asking - Can I Retire?

and

Early Retirement FAQs - Early Retirement & Financial Independence Community

We'll do our best to answer your questions also - lots of friendly and knowledgeable folks hang out here!
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Old 06-11-2015, 04:54 PM   #6
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The only other wrinkle to the pay off or not pay off the mortgage" question is the impact on your tax bracket. If you DO NOT have to come up with a house payment of $1800 and the duplex payment whatever that is - those are yearly income your portfolio DOES NOT have to pay and could be enough to put you in a lower tax bracket...if from 25% to 15% that also drops from 15% down to 0% taxes on dividends and cap gains which could be a significant savings... Everyone's situation will differ.


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Old 06-11-2015, 05:22 PM   #7
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The only other wrinkle to the pay off or not pay off the mortgage" question is the impact on your tax bracket. If you DO NOT have to come up with a house payment of $1800 and the duplex payment whatever that is - those are yearly income your portfolio DOES NOT have to pay and could be enough to put you in a lower tax bracket...if from 25% to 15% that also drops from 15% down to 0% taxes on dividends and cap gains which could be a significant savings... Everyone's situation will differ.


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Hmm, are you suggesting that I pay one or both off? The duplex mortgage is about $900.
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Old 06-11-2015, 05:25 PM   #8
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I appreciate the responses thus far. I have read the Forum's questions to consider for retirement and I am aware of FIRECalc.

Would anyone pay off the house (directly or by creating a taxable stock index account) or the duplex (for access to all of the rent and thus more monthly income) or no? This is what tickles my mind the most. I realize the negatives of either of these options (paying off house or duplex) yet both allow for cash flow and options in eight years. I could then let me 401K money sit and compound.

Thank you.
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How do I plan for 'the worst' to allow for options?
Old 06-11-2015, 05:43 PM   #9
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How do I plan for 'the worst' to allow for options?

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Originally Posted by happyandhealthy View Post
Hmm, are you suggesting that I pay one or both off? The duplex mortgage is about $900.
You have to do the math and see if it makes a difference in your tax bracket and how much.

Also house payments do not fit very easily into FIRECalc and similar SWR calculators because they all escalate your spending by inflation, but house payments (less taxes and insurance), don't rise with inflation, they are flat for the whole term assuming it is a flat rate mortgage. Add in the complexity of deductibility of interest, the decrease in interest payment as the years go on and the math gets really complex.


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Old 06-11-2015, 08:00 PM   #10
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I paused on the sentence where you mentioned the pension that wouldn't help your wife in any way. Is there another option that provides some survivor benefits even if it pays less upfront?

Will she get her own pension if she retires at the same time you do?
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Old 06-11-2015, 08:08 PM   #11
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Yes, she could teach long enough to earn her own pension (her plan), or I can take a reduced pension...or I could purchase a short-term life insurance policy at retirement.
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Old 06-11-2015, 09:14 PM   #12
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Obviously I don't know the specific financial details and how much of a cut is involved, but I'd look seriously at the pension option with some survivor benefits especially if you're planning for "the worst". Will she really want to continue working once you've retired, and what if she can't continue for some reason?
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Old 06-11-2015, 11:09 PM   #13
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You have to do the math ................
Uh, no, You have to do the arithmetic, and anyone can do it without help.
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Old 06-11-2015, 11:26 PM   #14
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IMO, if you want more options, hammer your overhead down as low as it can go, and housing is a big part of that.

From strictly a financial perspective, it may be better to keep money invested in a taxable account than payoff your housing debt, but if you're trying to bridge the gap between being off the payroll and being able to draw on tax deferred accounts, reducing the annual expenses makes that easier. This is also a religious argument with no clear answer .

Agree with Katiek about taking a second look at drawing a pension w/o survivor benefits. You're both young, and things happen in life, sometimes worse than you plan for. Working as a single parent with young kids, whether divorced or widowed, is harder than it looks and I think it is compassionate to minimize the impact of that under the "worst case" scenario.
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Old 06-12-2015, 05:49 AM   #15
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Yes, she could teach long enough to earn her own pension (her plan), or I can take a reduced pension...or I could purchase a short-term life insurance policy at retirement.
A short term life insurance policy wouldn't do anything for the survivor in the long term. I have never understood that approach. Taking the survivor benefit option is longevity insurance it seems to me and piece of mind for both spouses. I would suggest you take the survivor's option and she not do so to provide predictable revenue stream for the duration of your joint lives. If there weren't a significant age difference, I would suggest you both take the survivor's option.
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