Pay off remaining debt or FIRE?

[ClassOf2010]

Question: Should we work 3 more months to pay off a small (29k) second mortgage?
(First mortgage will be paid off and 18k of the 29k will come from working longer, 11k from savings)

The reason that I believe that this is not another "pay off the mortgage early" thread is that the tax benefits and amount of the debt is minimal. If this were a $29k credit card debt with a 7.69% interest rate that we were paying the $200 minimum payment on; wouldn't a responsible person pay it off before they retired? However, it would be nice to retire 3 months earlier since it is only a $200/month obligation. If we do not pay it off before we retire, it will take us about 3 years to pay it off (since SS will not start for me for 3.5 years, living on pensions only until then).

Our situation: My wife (56-RN) and I (58-engineer/attorney/INTJ) are trying to decide to FIRE at the end of September or at the end of December. FireCalc says that we will have about 2x our estimated annual expenses (55k - includes taxes and health insurance) in income from pensions, SS and IRAs. (FIRE assetts are 85k in non-cola pensions, 250k IRA's, 18k SS for me at 62 & 35k SS for my wife at 70.) So annual income is not a problem. Our problem is a shortage of available cash when we retire since we do not want to spend any of our $52k emergency fund. We will not have the cash to pay off the 29k, 30yr, $200/month (7.69%) second mortgage. We are currently using half of our take-home to pay down debt and we are getting close to being debt free (we just paid off the last student loan for my wife and 2 sons who have all graduated from PSU in the last three years).

We know that 3 months is not really a big deal, but we are really having a hard time deciding what to do so any input would be appreciated. Thanks in advance.

 

[73ss454]

Is that 85K a year in pensions? If so, quit tomorrow and pay off the mortgage whenever.

 

[BigNick]

Yes, if 85K is the annual pension amount that you can get tomorrow, $200/mo is change. You could maybe try and refinance for a lower rate, but with only $29K outstanding, it might not be worth the use of the your valuable retirement time. (If you can refinance over the phone while goofing off at work, of course, that's a different matter).

However, if 85K is the amount in the pot, which I presume is the case for the 250K in the IRA, then we have a cold shower for you...

 

[ClassOf2010]

The pensions are a total of $85k (non-cola) annually. Sorry about that, I tried to include everything but I also knew that I would miss something.

 

[seabourne]

Start the retirement, spend the 3 months living at your annual expense rate (55k/4 = 13.75k) and use the difference in the pension(85k/4-13.75k=7.5k) to attack your debt. It's better than continuing to work, and really, the 3 months isn't going to increase your pension or drastically increase your assets, you are comfortably FI at this point, so working is now voluntary. In all the years you now have to be retired in, in this one you are younger, probably healthier, more appreciative of the downtime, and it gives you a holiday season in which you, unlike everyone else, don't have to be madly overbooked and stressed. if you stick to your 55k budget and pay with the difference, it'll be paid off within the year. Don't sweat it.

 

[REWahoo]

What seabourne said. Retire, get aggressive in paying down your debt, and enjoy. Worst case, $200/mo is pocket change in relation to your $7,000/mo pensions.

 

[ERD50]

... So annual income is not a problem. Our problem is a shortage of available cash when we retire ...

It seems like you answered your own question.

Why would you try to improve something that is already not a problem (cash flow) by making an existing problem (liquid assets) worse? I'm with the others, the $200/month just is not an issue for you, financially.

Like many others, I think you are experiencing an emotional 'fear' of debt. Maybe it would help to just think of that debt a tool - it is allowing you to gain liquidity at the cost of cash flow. But that appears to be exactly what you need. If you were in the opposite position, lots of cash but lacking cash flow, you'd pay it off, right? So just use the tool to your advantage to match the circumstances.

Three months into retirement, I'll bet you'll look back and be glad for those three extra months - enjoy!

-ERD50

 

[ziggy29]

Like many others, I think you are experiencing an emotional 'fear' of debt.

Agreed. As I see it the main rational reason for "fear of debt" is still having it in the event of severely impaired cash flow such as a layoff. But if you have a $7000 monthly *secure* retirement income stream and extremely safe cash flow, I wouldn't let a $200 monthly debt stop me from calling it quits yesterday.

 

[Retire2013]

I'd say FIRE now. Your annual cash inflow looks strong and the 2nd mortgage is only $200/month! It should not represent any difficulty for you to pay it each month for the remainder of the life of that loan. Just my opinion. And you can have 3 months of relaxation in nice autumn weather! Go for it!

 

[Rich_by_the_Bay]

Can you negotiate a phase-down with your current employers, like maybe 3 months of part-time, passing all the net income to the mortgage?

That would let you enjoy a gradual transition to FIRE, a clean slate when you finally terminate, and less "guilt" about pulling the trigger too soon (though that is purely psychologic given your situation, which I agree allows you to FIRE now).

 

[ERD50]

Can you negotiate a phase-down...

Some people sure have a tough time 'cutting the cord'!!

Geez, it's three months - if this small debt is the only thing holding the OP up, just DO IT!

-ERD50

 

[Lakewood90712]

Maybe one of you retire asap ,and the other at the end of the year ?

 

[FUEGO]

I would suggest refinancing it (per a previous poster). If it is really bothering you, that is. I know Penfed is offering a fixed for 5 years HELOC at 4.13% with no closing costs right now. That may be a good "liquidity tool" to have a HELOC anyway. And may be easier to obtain while still working (although with 85k pension income it shouldn't be too hard to get after retiring).

I would feel a lot better paying ~4% interest vs paying 7.x% interest.

Financially it seems like you are set regardless of whether you pay the debt off immediately or FIRE. I'll likely be in a similar situation when we reach FI. We will probably have a couple ten thousand left on the mortgage when we hit FI. Not sure if I'll pay it off from savings or just pay it off monthly.

 

[Andre1969]

I'll join the ranks of those who are suggesting a refinance. I just checked my local credit union, and they're offering a 30 year fixed for 4%, a 15 year fixed for 3.75%, and a 5/1 ARM for 2.875%.

They're offering an HELOC for 4%, which might be a better deal as closing costs might be lower.

Even though $200/mo isn't much money, less is always better. And so is paying it off sooner!

 

[ClassOf2010]

Thanks to everyone for all the great responses. I agree with everyone, however the DW is not so sure (that is my opinion, not hers). Some of the things that I did not put in my origional post are:
1) I am the nerd of the family according to Dave Ramsey, DW is the "free spirit". So even though I have numerous charts and budgets (my current folder is over 2 inches thick) to show that we will be alright without paying everything off, I think that she needs some outside assurances. (btw - she has been watching this thread at her workplace so I should be getting a call real soon)
2) I have been following this board for about two years now and usually check it out a few times a day but we did not want to introduce ourselves until we notified upper management about our decision to FIRE, but we will introduce ourselves shortly.
3) About a year ago we decided to FIRE on June 18, 2010 but when it got close and there were a few more debts to pay - well I think that you can figure what happen next since we are still working!!
4) Even though we are very LBYM, but because of the cost of college for the 3 of them and the purchase of new cars before FIRE (we keep them 10 - 12 years) we are cash poor while paying off debt quickly (about 50k annually). Another reason that I posted is that everyone else on here seems to have paid of their debts long ago or at least have "buckets" of cash/CD's to use after they FIRE. I just thought that we were unusual (not in a good way) of having enough cash flow but being cash poor after working for 35 years.

 

[ziggy29]

Another reason that I posted is that everyone else on here seems to have paid of their debts long ago or at least have "buckets" of cash/CD's to use after they FIRE. I just thought that we were unusual (not in a good way) of having enough cash flow but being cash poor after working for 35 years.

Being "cash poor" in retirement is ill-advised for people without much in the way of a pension. But with $85K in annual pension income (plus SS in the future) and expenses at only $55K, it's not a worry IMO. Seems like that still gives you the ability to generate savings to build up your cash position if you're at all worried about it.

 

[REWahoo]

I just thought that we were unusual (not in a good way) of having enough cash flow but being cash poor after working for 35 years.

Anyone with an $85k annual pension is very unusual and far from my definition of cash or any other type of "poor".

 

[ziggy29]

Anyone with an $85k annual pension is very unusual and far from my definition of cash or any other type of "poor".

Yep. Another way to look at it is this: someone without a pension would have to accumulate over $2 million in retirement assets to secure a similar income stream in retirement -- and they would have the added anxiety of market risk.

 

[BigNick]

Anyone with an $85k annual pension is very unusual and far from my definition of cash or any other type of "poor".

Yes, and someone with that kind of pension ought to be able to get a reasonable rate for a loan if they suddenly needed a big chunk of cash.

 

[ClassOf2010]

Fuego/Andre - A HELOC for 4% sounds like a good idea. Thanks.

 

[Katsmeow]

Even though we are very LBYM, but because of the cost of college for the 3 of them and the purchase of new cars before FIRE (we keep them 10 - 12 years) we are cash poor while paying off debt quickly (about 50k annually). Another reason that I posted is that everyone else on here seems to have paid of their debts long ago or at least have "buckets" of cash/CD's to use after they FIRE. I just thought that we were unusual (not in a good way) of having enough cash flow but being cash poor after working for 35 years.

A few years ago, DH and I had debt and not a lot of cash. We did have good incomes and so really buckled down to pay debt which we have done (we still have mortgage on existing house but have it on market to sell it).

I semi-retired a few months ago. I have a 401(k) but no pension. DH retired a month ago and could have taken a sizable pension -- not $85k a year but not that far away from it. If he had done that our combined 401ks would have been about $340k.

In our case, we have elected for him to take a lump sum instead of a pension (lump sum is just over a million).

 

[Andre1969]

Anyone with an $85k annual pension is very unusual and far from my definition of cash or any other type of "poor".

I used to work with a woman who retired from the federal gov't at the age of 62, and then came to back to work as a contractor. She claimed that she just couldn't make it on her pension. Her pension that was over $60K per year, way back in 2004!

She came back to work part time, 3 days per week, making $25 per hour. I shouldn't know how much she made, but I did. I have no idea what her typical raise is, but if you figure just 4% per year (I've usually gotten 5%, although one year I got 6.8%), then when we get our raises this September, that should put her to around $31.65 per hour.

And last time I saw her, she was still whining about being broke, and how hard it is to make it in the DC area, and so forth. Some people just find ways to spend money, no matter how much they make.

Heck, I wasn't even making $60,000 per year back in 2004! So if I suddenly got a $60K/yr pension thrown in my lap, I would've retired on the spot!

 

[ziggy29]

I used to work with a woman who retired from the federal gov't at the age of 62, and then came to back to work as a contractor. She claimed that she just couldn't make it on her pension. Her pension that was over $60K per year, way back in 2004!

...

And last time I saw her, she was still whining about being broke, and how hard it is to make it in the DC area, and so forth. Some people just find ways to spend money, no matter how much they make.

Presumably she's attached to the DC area and its relatively high cost of living, then, because if she was retired with a $60K federal pension (presumably CSRS) she really doesn't need to stay in a high cost area. Granted it's not quite SF, NYC or Boston but it's still pretty high. Even if she was a "city gal," there are plenty of cities in "flyover country" where $60K goes a lot farther.

 

[ClassOf2010]

I assume that everyone realizes that our non-cola pensions are 85k total (47k me, 38k DW) which means if they are compared to the federal cola pensions under the old federal system, they would be worth about 2/3 of them or 31k and 26k (57k total).

 

[ziggy29]

I assume that everyone realizes that our non-cola pensions are 85k total (47k me, 38k DW) which means if they are compared to the federal cola pensions under the old federal system, they would be worth about 2/3 of them or 31k and 26k (57k total).

Give or take, yes, for sure a non-COLA pension has additional retirement planning wrinkles than a fully COLA'd one and isn't as valuable given the same initial payouts.

I think it's therefore important to concentrate your personal investments (plus whatever excess cash flow you'll have in the first few years) in areas that are best able to weather inflation. And perhaps you can save enough extra cash flow in the first few years that you can hold off on all your SS until age 70 and maximize the amount of COLA'd income you can possibly receive.