Wendy
Recycles dryer sheets
- Joined
- Jul 25, 2007
- Messages
- 54
Following my intro post, my first big question concerns stretching our cash to cover expenses between now and age 59.5. To recap, DH would like to retire next year at age 53. I'll be 55 then, with four years left until I can tap my IRA. Then more income streams will kick in and we should be okay after that. (I'll work on the next five years once this is sorted out.)
I created a detailed 5-year cash flow plan based on our actual spending over the last few years and conservative assumptions: medical expenses growing at 6%, other expenses at 2%, and a fixed-rate mortgage. Then I added back a travel allowance. My thinking is that we'll want to travel now, while we're relatively young and healthy, because who knows what will happen in the future? I also want a cushion to cover major expenses that might come up, like replacing our two cars and the roof.
I assumed that interest rates will remain flat and our after-tax funds will have 0% growth, which I guess equates to -2% or so real return. DH's pension COLA will cover some of the inflation. I'm willing to trade upside potential for safety for this first part of ER, while still maintaining a comfortable lifestyle. We can always cut expenses if necessary.
At our current spending level, this is tight, so the first thing I want to do is refi our mortgage. We owe a balance of $127k at 5%, with payoff scheduled for 2018. My CU offers a 10-year home equity loan at 3.49% with closing costs about $1000. We'd recoup that in less than two months. This would free up enough cash during the next five years to give us a $30k cushion for emergencies, if we spent at the maximum rate and didn't earn a penny on our savings. The payoff date would be pushed back from 2018 to 2022, but I figure we can pay it off after I hit 59 if that makes sense. We'd also lose some of our current tax deduction but I don't think that should drive our decision.
I also looked at the PenFed mortgages and HEL's but none of them seemed to make sense—either the costs were higher or the term too short. But I like their 5/5 HELOC as a potential source of emergency cash. We'd lock in a rate of 3.78% which wouldn't reset until about a month before I hit 59.5. So worse case, we take out a loan at 3.78%, the rate switches to their max of 5.78% and we carry that for a few months until I hit 59.5. Then we have the option of paying it down with retirement funds. I'm sure we'd cut our other spending, too, if that happened.
My other emergency contingency plan is to tap our ROTHs. Between us we contributed about $17k. Both will be five years old in 2014, and if I understand this correctly we can withdraw the contributions then without penalty.
On the income side, I'm planning to start my pension when he retires. I can take a "level 62" option, which means a large annual payout until I turn 62, then a much smaller one after that. The pension has no COLA, so my reasoning is that the money is more valuable now then later, and prevents us from making penalty withdrawals from IRA's before 59.5. The lump sum doesn't make sense to me because it would bump us into the next tax bracket. I checked the online annuity calculators and my pension seems to give a much better payout for the same starting sum. I also like shifting the interest rate risk to the pension company.
So that's it for now. Is there anything I'm missing or that doesn't make sense? I have a nagging feeling I'm overlooking something simple and obvious since a lot of this is still new to me.
I created a detailed 5-year cash flow plan based on our actual spending over the last few years and conservative assumptions: medical expenses growing at 6%, other expenses at 2%, and a fixed-rate mortgage. Then I added back a travel allowance. My thinking is that we'll want to travel now, while we're relatively young and healthy, because who knows what will happen in the future? I also want a cushion to cover major expenses that might come up, like replacing our two cars and the roof.
I assumed that interest rates will remain flat and our after-tax funds will have 0% growth, which I guess equates to -2% or so real return. DH's pension COLA will cover some of the inflation. I'm willing to trade upside potential for safety for this first part of ER, while still maintaining a comfortable lifestyle. We can always cut expenses if necessary.
At our current spending level, this is tight, so the first thing I want to do is refi our mortgage. We owe a balance of $127k at 5%, with payoff scheduled for 2018. My CU offers a 10-year home equity loan at 3.49% with closing costs about $1000. We'd recoup that in less than two months. This would free up enough cash during the next five years to give us a $30k cushion for emergencies, if we spent at the maximum rate and didn't earn a penny on our savings. The payoff date would be pushed back from 2018 to 2022, but I figure we can pay it off after I hit 59 if that makes sense. We'd also lose some of our current tax deduction but I don't think that should drive our decision.
I also looked at the PenFed mortgages and HEL's but none of them seemed to make sense—either the costs were higher or the term too short. But I like their 5/5 HELOC as a potential source of emergency cash. We'd lock in a rate of 3.78% which wouldn't reset until about a month before I hit 59.5. So worse case, we take out a loan at 3.78%, the rate switches to their max of 5.78% and we carry that for a few months until I hit 59.5. Then we have the option of paying it down with retirement funds. I'm sure we'd cut our other spending, too, if that happened.
My other emergency contingency plan is to tap our ROTHs. Between us we contributed about $17k. Both will be five years old in 2014, and if I understand this correctly we can withdraw the contributions then without penalty.
On the income side, I'm planning to start my pension when he retires. I can take a "level 62" option, which means a large annual payout until I turn 62, then a much smaller one after that. The pension has no COLA, so my reasoning is that the money is more valuable now then later, and prevents us from making penalty withdrawals from IRA's before 59.5. The lump sum doesn't make sense to me because it would bump us into the next tax bracket. I checked the online annuity calculators and my pension seems to give a much better payout for the same starting sum. I also like shifting the interest rate risk to the pension company.
So that's it for now. Is there anything I'm missing or that doesn't make sense? I have a nagging feeling I'm overlooking something simple and obvious since a lot of this is still new to me.
