What Should I do?

[tsmisc]

Hi All,

I'd would appreciate hearing your opinions on what I should do.

Married with no kids. Me-50, Wife-52
House - Paid.
Cars - Paid.
Lifestyle - Simple, nothing fancy.

Investment property 1 - Paid; Rent income: 1,700/month
Investment property 2 - Mortgage - 265K; Rent income: 2,250/month

Money market and CDs - 370K
Taxable portfolio - 400K (conservative index funds and conservative individual stocks) All equity.
Tax deferred - 1.5 million (70% index funds, 20% managed funds, and 10% individual stocks) All equity.
Roth - .5 million (100% Agressive managed funds) All equity.

My plan is to retire at the end of next year with the option of either working part time or not working at all. Wife still wants to work part-time grossing approximately 40K/year. We will spend down our Cash and Taxable accounts until I reach 60 - so about 8 years.

After funding our sep-ira (40K/year) and taxes, our take home income will be about 130K/year. I'm thinking of using this money to pay off investment property 2 rather than putting it in cash/CD earning around 1%. My reasoning is not only it's at a higher rate, it will also give a peace of mind knowing the market will not have an impact, and it'll be nice to not carrying this debt into ER.

The net combined rent income should almost cover our basic monthly expenses.

My question: Am I doing the right thing, given that I want to stay in a lower tax bracket in the future? Is it better to put this 260K somewhere else? I am not sure other than money market and CD's since bonds don't sound like it's a good alternative right now.

Thank you!

 

[Animorph]

If you have a nice interest rate on the mortgage a long time period left, and are taking the mortgage interest tax deduction, you could consider keeping it. The same old investments versus mortgage problem. It kind of looks like part of your bond portfolio component, since everything else is mostly equity. It probably makes sense to pay it off if you can beat current CD/MM rates, if you aren't considering using your normal AA for the investments. And if your mortgage doesn't allow you to keep a little more money for the 8 year haul to age 60 that you might need. You won't be able to match the mortgage interest rate and safety with CD's/mm's.

 

[Dash man]

Your mortgage interest can only be used to offset the investment income from your rental properties. You should do the math to figure out how much additional tax you'll have to pay after your other investment expenses and depreciation are deducted but without the mortgage deduction. Then decide if the money can be better used elsewhere to offset that with a better return. Perhaps even buying another investment property.

 

[LendingWire]

I think paying off your mortgage should be your first concern, since with interest you're only going to be losing money by not paying for it. I don't think the money you make from investing in CDs would even pay back the interest that would incur from the mortgage. Being stuck with a mortgage in retirement is just not pleasant anyways, I'm sure you'd feel less stressed when you knew that that property was all paid off and it was yours for good. I'd say you're doing the right thing.

 

[tsmisc]

Thank you all for your input.

This is my plan now: I'm going to run some numbers through turbo tax by basically taking my salary out and eliminate the interest expense. If we are in the 15% tax bracket, then I will pull the trigger to pay the mortgage off.

 

[pb4uski]

I don't think it is a great idea to pay off that rental property mortgage (assuming your mortgage interest rate is not very high). What is the interest rate and what is the monthly P&I?

You have plenty of cash (in fact, arguably too much) so the cash flow that would be used to pay off that mortgage would presumably be invested in taxable accounts and would likely earn more than your mortgage interest rate.

Another thing you might consider doing with new money investments is diversifying into fixed income. Your current AA is 87/13 and a higher fixed income allocation would reduce volatility some. The potential problem with bonds right now is interest rate risk when/if rates increase but you can mitigate the interest rate risk with CDs or target date bond funds or stable value funds if you have access to one in your 401k.

What you will probably want to do at some point once you are both retired is to do Roth conversions to at least the top of the 15% tax bracket to reduce future RMDs and taxes once SS starts.

One thing I suggest you do is do a pro forma tax return assuming you retire or work part time and your DW works part time with all else held constant and see that average and marginal tax bracket you will be in once you graduate to that stage.

 

[tsmisc]

I don't think it is a great idea to pay off that rental property mortgage (assuming your mortgage interest rate is not very high). What is the interest rate and what is the monthly P&I?

You have plenty of cash (in fact, arguably too much) so the cash flow that would be used to pay off that mortgage would presumably be invested in taxable accounts and would likely earn more than your mortgage interest rate.

Another thing you might consider doing with new money investments is diversifying into fixed income. Your current AA is 87/13 and a higher fixed income allocation would reduce volatility some. The potential problem with bonds right now is interest rate risk when/if rates increase but you can mitigate the interest rate risk with CDs or target date bond funds or stable value funds if you have access to one in your 401k.

What you will probably want to do at some point once you are both retired is to do Roth conversions to at least the top of the 15% tax bracket to reduce future RMDs and taxes once SS starts.

One thing I suggest you do is do a pro forma tax return assuming you retire or work part time and your DW works part time with all else held constant and see that average and marginal tax bracket you will be in once you graduate to that stage.

The rate on the mortgage is 3.75. P&I is around 1,750.

Yes I do plan on doing roth conversions to the top of 15% when I'm retired, and will also do a pro forma tax return like you suggested.

The new money is after tax, and after sep-ira contribution. So it will be in a taxable account. I already have cd's earning low interests.

I'll look into target date bond and stable value funds. Any suggestions?

Thank you.