Can't make up our minds

[golfnut]

Our situation described below:

I am 55 and my young wife is 52. I recently lost my job and my wife works pt. (makes about $13,000 per year) We realize it will be very difficult for me to secure a job matching my previous salary.

I will receive a small non colaed pension of $8,400 per year (pretty much decided to take this vs. the lump sum of $134,000). I previously posted this on the forum and the responses were pretty much split down the middle (lump sum vs. yearly payout.) Thanks to everyone who responded.

I do get retiree HC thru the employer but it ain't cheap ( annual premium including dental is approx $12,000) for a family of three. Just wondering if I should check on getting a quote for an individual plan?? I was advised by my previous employer that the pool of participants in this plan are retirees which of course, raises the premium. Any insights here would be appreciated.

We still have $59,000 outstanding on our 15 yr. fixed 4.75 mortgage and $18,000 on a home equity loan (3% variable rate). Home is worth approx. $450,000. Probably will look to downsize in 2 years which should result in some cash in our pocket and much lower RE taxes (which are presently $9,600 her in the western burbs of Chicago).

Our son will be attending college in 2011 (probably a local JC for his freshman year and public state school after). We have 529 plan for him (balance approx. $91,000).

We are presently working on a budget and it appears we can do okay on approx. $80,000 per year with the mortgage / home equity debt and $68,000 with these debts payed off.

We have approx. $1.4mm saved up (50% equity, 32% bonds and 18% cash). Note this is an addition to the 529 balance.Of course if we pay off, the debt ($77,000), we would have apprx $1.3mm. We were thinking a 3.5% annual withdrawl until such time I land on my feet.

Can't decide if we should pay off debt or keep the cash given our situation?? Having the cash feels good even though it's not makin' any return.

Any feedback here (especially as it relates to HC costs and the payoff question) would be greatly appreciated.

Thanks,

Golfnut

 

[Alan]

It looks like you have >$250k in cash. You don't say what it is earning but if it were me I would at very least pay off the 4.75% mortgage. Do you know how much of that mortgage interest is tax deductible (ie how much over your personal allowances does it put you?). Also, will your new tax bracket be lower with your new much lower income (reducing further any tax advantage of the mortgage interest).

I don't know how the HC insurance measures up against what you could get outside of your retiree plan (including dental). I would figure out how much do you typically spend including Dr visits, premiums, prescriptions, dentist visits etc. This will include your deductibles etc. If you look at other plans then you'll need to match them with your current spending.

When our daughter was at college she got married at the end of her first year, and was therefore dropped from my employee plan, but she got insurance through her public/state college and it was remarkably cheap and good. Once your son gets through JC and into his college you may find you can save a chunk by getting his insurance through there and dropping him from your retiree plan.

 

[golfnut]

It looks like you have >$250k in cash. You don't say what it is earning but if it were me I would at very least pay off the 4.75% mortgage. Do you know how much of that mortgage interest is tax deductible (ie how much over your personal allowances does it put you?). Also, will your new tax bracket be lower with your new much lower income (reducing further any tax advantage of the mortgage interest).

I don't know how the HC insurance measures up against what you could get outside of your retiree plan (including dental). I would figure out how much do you typically spend including Dr visits, premiums, prescriptions, dentist visits etc. This will include your deductibles etc. If you look at other plans then you'll need to match them with your current spending.

When our daughter was at college she got married at the end of her first year, and was therefore dropped from my employee plan, but she got insurance through her public/state college and it was remarkably cheap and good. Once your son gets through JC and into his college you may find you can save a chunk by getting his insurance through there and dropping him from your retiree plan.

Alan,

Thanks for the quick response. Regarding the mortgage, it appears in 2010, we will have paid $3,100 in interest. We are in the 6th year of the loan. In 2011, the interest will be less, of course. Not sure how to answer your question regarding the deductibility of the interest. However, we are leaning towards paying off the mortgage.

Figuring out HC costs is a b*tch !. Thanks for the tip regarding our son once he is off to college. Our annual premium would be reduced by $3,000 if we took him of four plan. Any idea what it cost for a separate plan ?

 

[Alan]

Alan,

Thanks for the quick response. Regarding the mortgage, it appears in 2010, we will have paid $3,100 in interest. We are in the 6th year of the loan. In 2011, the interest will be less, of course. Not sure how to answer your question regarding the deductibility of the interest. However, we are leaning towards paying off the mortgage.

Figuring out HC costs is a b*tch !. Thanks for the tip regarding our son once he is off to college. Our annual premium would be reduced by $3,000 if we took him of four plan. Any idea what it cost for a separate plan ?

The easiest way to check on how much of your mortgage interest is deductible is with a tax program such as TurboTax or TaxAct both of which are available free. It will take you through itemizing your deductions and comparing the results with your standard deduction to see which is better. e.g. If your itemized deductions add up to $3,100 more than your standard deductions then all of your interest is deductible so your morgage interest will be reduced by your effective tax rate that year.

I know that keeping track of HC costs is painful. I keep a spreadsheet to total up everything I spend on costs and record the monies from every payment as it happens through the year, plus the details from the EOB forms as they come through from the insurance company.

Our daughter is now 30 so it has been 10 years since since she switched to the university health care insurance. Even if I could dig out the costs it wouldn't be relevant today. Perhaps you can inquire at college to get an idea of scale. $3k/year is a lot for a young man with no health issues so I would think you could do much better through a college program if they still offer them.

 

[golfnut]

Alan,

Thanks for the response regarding exemptions etc...

Will need to get working on the HC costs using a spreadsheet.

For grins, I looked up HC costs for a college student and it looks like it's about $600 per year.

Really wish I could join the 2010 class of early retirees !!

 

[donheff]

You should contact some insurers and see what individual plans would cost. On the mortgage it is sure nice to be rid of the debt.

 

[golfnut]

Donheff,

Thanks for the response.

 

[ksr]

I do get retiree HC thru the employer but it ain't cheap ( annual premium including dental is approx $12,000) for a family of three. Just wondering if I should check on getting a quote for an individual plan??

You should definitely find and compare your options before making a decision. eHealthInsurance is a good website for finding and comparing plans. You also need to consider whether you want to go with a high-deductible plan, which can save you significantly in premiums. Make sure you understand what you are getting with each plan.

When I left megacorp 3 years ago I did a lot of research and decided on a high-deductible plan with HSA. I did not initially have any dental insurance, but was dismayed to find how much more my dentist was charging simply because I had no dental plan. I ended up paying for a dental discount plan (not the same as insurance, but participating dentists accept a considerably reduced rate). Even though I pay around $100/year for the plan, I still come out ahead with just a couple of routine visits.

One other thing I've found about buying my own policy is that I have to stay on top of it - every year I re-evaluate my choices and consider changing plans if it is beneficial.

 

[haha]

This is likely not a very welcome suggestion, but you might consider that you really are not in position to spend $91,000 on your son's education.

Does U of Illinois have Chicago Campus? If he could live at home, do 2 years at Community College and tx to UI you will all be better off. He will know that he did not stress his family when they are stressed enough, and you and wife will also know this.

If he is not really gung ho for a practical career suggest a trade. Tradesmen seem to have a more secure career path than salarymen today, and they do not start out in the hole, or cost their parents an arm and leg.

Ha

 

[golfnut]

You should definitely find and compare your options before making a decision. eHealthInsurance is a good website for finding and comparing plans. You also need to consider whether you want to go with a high-deductible plan, which can save you significantly in premiums. Make sure you understand what you are getting with each plan.

When I left megacorp 3 years ago I did a lot of research and decided on a high-deductible plan with HSA. I did not initially have any dental insurance, but was dismayed to find how much more my dentist was charging simply because I had no dental plan. I ended up paying for a dental discount plan (not the same as insurance, but participating dentists accept a considerably reduced rate). Even though I pay around $100/year for the plan, I still come out ahead with just a couple of routine visits.

One other thing I've found about buying my own policy is that I have to stay on top of it - every year I re-evaluate my choices and consider changing plans if it is beneficial.

KSR,

Thanks for the response.

Note my employer plan is a high deductible hsa plan. I plan on looking at other plans thru ehealthinsurance.

 

[golfnut]

This is likely not a very welcome suggestion, but you might consider that you really are not in position to spend $91,000 on your son's education.

Does U of Illinois have Chicago Campus? If he could live at home, do 2 years at Community College and tx to UI you will all be better off. He will know that he did not stress his family when they are stressed enough, and you and wife will also know this.

If he is not really gung ho for a practical career suggest a trade. Tradesmen seem to have a more secure career path than salarymen today, and they do not start out in the hole, or cost their parents an arm and leg.

Ha

I appreciate your reply here but we will make it work with our finances. Quite candidly, I felt more stress when I had my job.

 

[youbet]

If your son is going to attend COD, you'll find that transfering to a quality 4 year institution will be relatively easy if he has good grades. It's good to live in a community with a top ten junior college!

 

[chinaco]

Consider all of your options at each age. Would You be better off taking your pension at an older age? It could depend on the rules of your pension and how the payout is calculated, your health, etc. Talk with someone in your benefits dept. Make sure you understand the rules and how the pension is calculated for the annuity payout and the lump sum.

 

[golfnut]

If your son is going to attend COD, you'll find that transfering to a quality 4 year institution will be relatively easy if he has good grades. It's good to live in a community with a top ten junior college!

Yeah, that's what I hear. I have to be careful not to build COD up too much because then he won't want to go there. Nothing like dealin with a teenager!

 

[haha]

If your son is going to attend COD, you'll find that transfering to a quality 4 year institution will be relatively easy if he has good grades. It's good to live in a community with a top ten junior college!

What is COD?

Ha

 

[golfnut]

COD is College of DuPage

 

[Alan]

Yeah, that's what I hear. I have to be careful not to build COD up too much because then he won't want to go there. Nothing like dealin with a teenager!

Sounds like our daughter, we had to tread very carefully and cheer behind the scenes when she actually made choices we wanted.

 

[youbet]

COD is College of DuPage

Yes, indeedy. And BTW, I am an alum from decades ago! COD helped me get to FIRE, so no complaints. An outstanding jr college.

Of course, I was in a vocational program. Sounds like your son is aiming a little higher.

 

[Blackwoodt]

KSR,

Thanks for the response.

Note my employer plan is a high deductible hsa plan. I plan on looking at other plans thru ehealthinsurance.

Just a note, and speaking from experience don't expect the online quote that you receive with any of the health insurance programs to be accurate if you have any, and I mean any health issues.. no matter how small. You will not know the true cost until you have filled out all of their forms, and it has gone through the underwriters. My original quote for myself + spouse on a high deductable started out at $400, by the time it came back from the underwriter it was over $550.00.

 

[golfnut]

Yes, indeedy. And BTW, I am an alum from decades ago! COD helped me get to FIRE, so no complaints. An outstanding jr college.

Of course, I was in a vocational program. Sounds like your son is aiming a little higher.

Maybe you're from Chi-town (like me)?

Not sure what my son is aiming for right now besides driving a car, hangin out with his buds, xbox and last but not least girls.

 

[golfnut]

Any other thoughts/feedback would be appreciated.

Thanks,
Golfnut

 

[rayvt]

I don't understand the fascination some people have for paying off the mortgage. Especially since your income has been severely hit.

Running out of liquidity is a nasty thing to have happen to you. And that's just what can happen to people who pay off their mortgage with a big chunk of their cash. OTOH, a 77K balance is pretty small--but I still wouldn't pay it off.

FWIW, I've been retired for 4 years, and just closed on a 4% 30 year refi. My wife let it slip to our neighbors (also retired, but they paid off their house) that we'd just refi'ed and what our payment was. She gasped when she heard our payment amount. But the loan is at 4%, and we have a "preferred & dividend stock" portfolio that earns about 7% and the total portfolio value is about 30% less than the mortgage balance. So we're making net 3% overall and the (lumpy) dividend payout is just a tad smaller than the mortgage payment.

 

[golfnut]

I don't understand the fascination some people have for paying off the mortgage. Especially since your income has been severely hit.

Running out of liquidity is a nasty thing to have happen to you. And that's just what can happen to people who pay off their mortgage with a big chunk of their cash. OTOH, a 77K balance is pretty small--but I still wouldn't pay it off.

FWIW, I've been retired for 4 years, and just closed on a 4% 30 year refi. My wife let it slip to our neighbors (also retired, but they paid off their house) that we'd just refi'ed and what our payment was. She gasped when she heard our payment amount. But the loan is at 4%, and we have a "preferred & dividend stock" portfolio that earns about 7% and the total portfolio value is about 30% less than the mortgage balance. So we're making net 3% overall and the (lumpy) dividend payout is just a tad smaller than the mortgage payment.

You hit the nail on the head. We are struggling with this decision. On one hand, it would be great to do away with the monthly obligation of paying off the debt but on the other hand, we do plan on selling and downsizing in apprx. 2 years and having this cash in the bank is somewhat comforting. We are also thinking of paying off the debt in large chunks over the next 12 months.

Decisions! Decisions!

 

[haha]

Decisions! Decisions!

Avoid paralysis by anlysis. In your situation, none of it is likely to be determinative of anything important.

Ha