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62 yr old Retiree withdrawal question - help
Old 09-11-2007, 01:03 PM   #1
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62 yr old Retiree withdrawal question - help

My housemate/landlord asked for my advice and I suggested I post her question here for addition input:

She owns three rental properties (two with regular tenants, and she rents out two rooms here in her home) Discounting rents received to cover mortgages and misc. business expenses, the numbers here are strictly for her personal finances (and her share of the household expenses here.)
All numbers have been rounded to make this easier:

Monthly expenses (personal) - $1500
SS: $750
Rental income: $750

She has approx $200K in pension/401K that she is not withdrawing from.

There is a $22K debt (daughter got married in England in April )that is currently at 0%, but the rate ends in October 2007.

Would it be wise to withdraw $22K from pension/401k accounts to just pay off the debt?

Would you put $10K (emergency fund) in a MM account? (Currently just sitting in a savings account)

Thank you in advance for your opinions/advice.
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Old 09-11-2007, 01:59 PM   #2
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Quote:
Originally Posted by Fireup2025 View Post
There is a $22K debt (daughter got married in England in April )that is currently at 0%, but the rate ends in October 2007.
Would it be wise to withdraw $22K from pension/401k accounts to just pay off the debt?
With the numbers given, I'm not sure where else she has the money to do so. Is she proposing to pay off a little each month from her $1500 cash flow? That could take a long time.

If she's thinking of getting a home-equity loan (or more mortgage on the real estate) then the interest on those loans may be less than the Oct interest on the $22K debt. It'd be tax-deductible, too, but only a benefit in excess of the standard deduction. Most people don't pay enough mortgage interest to make that worth the effort.

Paying off the $22K debt out of the retirement funds would forego a bit of tax-free compounding, but she's old enough to withdraw the money without penalty and again she doesn't seem to have another source of funds to pay off the debt.

If she's trying to decide between using home equity or her retirement portfolio... well... that's the pay-off-the-mortgage-or-invest-the-money question, and we're not going to start that reciprocated diatribe debate again.

Quote:
Originally Posted by Fireup2025 View Post
Would you put $10K (emergency fund) in a MM account? (Currently just sitting in a savings account)
Absolutely, with full faith that a company like Fidelity or Vanguard would make the MM account whole if some misfortune or malfeasance actually drove the share value below $1.

Another option would be to buy a long-term CDs (like PenFed's three-year at 5%) in $1000 chunks. She could break one or two $1000 CDs as needed for emergencies without suffering too much pain, and even so she'd still probably be far ahead of the savings account.

An over-the-top long-term option would be to build a CD ladder out of the $10K, but that'd take some time & effort. However she could put the whole $10K in the money market and gradually withdraw it to buy a $1000 five-year CD every six months. Might be too much tracking & renewal effort for most investors.
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Old 09-11-2007, 02:02 PM   #3
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Quote:
Originally Posted by Fireup2025 View Post
My housemate/landlord asked for my advice and I suggested I post her question here for addition input:

She owns three rental properties (two with regular tenants, and she rents out two rooms here in her home) Discounting rents received to cover mortgages and misc. business expenses, the numbers here are strictly for her personal finances (and her share of the household expenses here.)
All numbers have been rounded to make this easier:

Monthly expenses (personal) - $1500
SS: $750
Rental income: $750

She has approx $200K in pension/401K that she is not withdrawing from.

There is a $22K debt (daughter got married in England in April )that is currently at 0%, but the rate ends in October 2007.

Would it be wise to withdraw $22K from pension/401k accounts to just pay off the debt?

Would you put $10K (emergency fund) in a MM account? (Currently just sitting in a savings account)

Thank you in advance for your opinions/advice.

Not much detail, but...

Rules of thumb:

1. Pay off highest interest rate if possible. This may mean using the $10K in savings account first. ( She can always take out a Line of Credit on her property for a real emergency.)

2. Take money from 401K last. Now that depends on a lot of things. For instance, is she over 59 1/2? What is her marginal tax rate? If it's low, then she might want to draw from that account for the balance.
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Old 09-11-2007, 02:23 PM   #4
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Quote:
Originally Posted by Fireup2025 View Post
There is a $22K debt (daughter got married in England in April )that is currently at 0%, but the rate ends in October 2007.

.

Depends greatly on what the interest will be be on the $22K debt after Oct 07. Also depends on what RoR is on their investments. If the interest is much lower than the RoR on investments, may want to pay it off gradually. If much higher, may want to pay it off immediately out of the $200K.
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Old 09-13-2007, 11:24 AM   #5
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Thanks so far

She got the 0% extended to January. Sounds like 50-60% of the 10K stash will go towards the 22K in Jan, and take out some of the pension/401k to knock it out. Home eq LOC is reserved for real emergencies. When this 22K was spent, she was looking at making (guilty of counting chicks before hatching) more $$$ on another RE property.
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Old 09-13-2007, 01:13 PM   #6
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You might want to do some analysis of the tax situation to see if it would be to her advantage to take part of the distribution this year and part next year to avoid being pushed into a higher tax bracket if it was all taken out next year.
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