Cash poor, retirement fund rich

[mystang52]

I am thinking about this mainly because I am looking to buy a piece of land, and I am having to do a cash out refinance on my house to build the war chest.... frustrating when sitting on $2 million.

Guess this is more of a rant than anything else.

So you lower your home equity to 100K to finance a 200K piece of bare land.

So when you build you are going backwards and will owe a minimum of 800K plus on a monthly house payments, plus increased taxes? When you say the dream place will cost 900K does that include the price of the land? ...does this really seem like the road to ER?

A $900,000 home on $2M in savings that tax has to be paid on, plus $140,000/yr spending that is likely to go up with a new home? Higher taxes, utilities, landscaping, maintenance, decorations and furnishings will add costs. I would not be comfortable with that. You could retire with a lower standard, but I’d be afraid to without major changes.

I know several people (do I attract them for some reason?) who make very substantial income but cannot retire. They always seem to find something else to spend [substantial] money on. OP: Nothing wrong with a wish to buy that piece of land, if you had spare cash to do so. But it seems to me that is not the case. Please take a second look at your plans; it's not just cashflow but happiness and peace after retirement that may be elusive.

 

[Aerides]

OP isn't really "living large" on net $120k expenses if he is including a mortgage and the upkeep of horses in that number.

I forgot to add, there are lower interest rates on your 401K loan if it's for a mortgage. I don't know the specifics, such as if it must be on your primary residence or not, for example. All I know is that it allowed me to assist funding my forever home without cutting the corners I would have otherwise.

401k loans, mortgage or otherwise, become 100% due when you leave your employer, and I don't know if they are as simple to move/refi as regular bank notes (probably not?)

 

[Hamlet]

- Yes, horses. Word to the wise.....never get in a relationship with someone who loves horses. I am now 29 years to late to that realization.

If you start talking about buying a boat in retirement we’ll know you are in real trouble.

 

[ivinsfan]

Sniggle you should do whatever you want to do.

Your comment about buying a new house because you don't want to travel made me laugh out loud. We had a farming neighbor who was broke to the point of write-offs, weekly convos with the banker broke. Yet he could always finagle new personal toys. Every single time he showed us a new toy, he would say.."well, I don't drink or smoke so I figured I could treat myself".

But I figure you can't buy 200K in bare land, do site improvements, water, sewer, power, stick build a custom home and a place for horse for a total of 900K.

 

[Amethyst]

How many people are eating for $1200 a month? (Or does that include horse fodder?)

As far as food goes, we are up to $300 a month per person, and we don't buy the cheap stuff. Salmon, filet mignon, scallops, higher-end chocolate all appear on the menu at least monthly. I prepare all meals; no takeout or going out to eat.

(You're not going out to eat in this pandemic are you? )

LI am guessing $1200 goes to food in the month,

 

[Music Lover]

Both the DW and I want to retire to a house that fits us perfectly, and building seems like the way to go. My approach is to buy the land first, spend about 1.5 years making all the decisions that are needed around the house, then getting it built to coincide with when I want to retire

This is something I hear often and don't really get. Unless you have very specific requirements that are really out there it shouldn't be that hard to find a house the right size that fits or almost fits your wish list. Let someone else do all the work and then you only have to make a few minor changes.

I'm very handy and have thought about building a house, and by building I mean doing a lot of it myself rather than just hiring a builder. But when I look at the listings I realize I can find something that's 90% or more closer to ideal but someone else has already done all the work, built the garage and out buildings, poured the driveway, done the landscaping, etc.

 

[OldShooter]

This is something I hear often and don't really get. Unless you have very specific requirements that are really out there ...

Well ... he did say he wants his land fenced with a horse barn.

 

[Time2]

OP isn't really "living large" on net $120k expenses if he is including a mortgage and the upkeep of horses in that number.

Horses are large!


On another note, in another post I was dismissive of the $900k house while I was thinking I would have a $300k house and $600k of outbuildings filled will big boy tools and toys. I guess with horses he's doing that.

 

[Music Lover]

Well ... he did say he wants his land fenced with a horse barn.

I guess it depends where you live. There is no shortage of those types of properties, or at least the required space with a lot of the work already done in many areas.

 

[cyber888]

If you have a $60K pension + $30K SS + probably $50K from your retirement fund, I think you'll be ok. You just need to build up savings for your $900k house. Pretty sure you can find land and not pay all cash for it - just need to find a landowner that is flexible.

- I have made peace with having a mortgage in retirement. I will have enough fixed income incoming, to more than cover a relatively large mortgage. I could always pay it off quickly by puling from the retirement funds, but if the rates stay low (below 4%) when we lock on the new house I would see no point in doing that.

- I am not talking a mansion. Looking at plans for a 2500-sq. ft. ranch with basement, changes made to suit our needs, designed to minimize energy costs and keep us warm and cozy.

- Some people want to retire to travel, some folks want to retire to a beach, the DW and I want to retire to a house that that will work for us into our 80's. I saved all my life to be in this position. I figure all in $900k, including land, fencing, horse barn. So, yes, from a mortgage perspective I am going way backwards into retirement.

- Yes, horses. Word to the wise.....never get in a relationship with someone who loves horses. I am now 29 years to late to that realization.

 

[Bamaman]

My grandmother somehow came up with $4,500 to buy 200' of prime lakefront property in 1945. And 5 generations later, I have that lakefront property with a 1700 square foot cabin. Just the land alone is now worth $600K.

And like my father said, "They only have so much lake property and when it's gone it's gone."

You'd do better to buy the lakefront property as soon as possible. And if you need room for a barn, buy a piece of property close by. Lake property costs too much to make pasture out of it.

 

[pjigar]

I'm very handy and have thought about building a house, and by building I mean doing a lot of it myself rather than just hiring a builder. But when I look at the listings I realize I can find something that's 90% or more closer to ideal but someone else has already done all the work, built the garage and out buildings, poured the driveway, done the landscaping, etc.

I kind of agree with you there. I have been through the whole ordeal of building the house myself (rather gut-out renovation). It was too much of a time commitment. I enjoyed most of it but family is not very happy. if anyone EVER decides to build on their own then make sure you have the family commitment to do hands on work and the family has to be as excited (or more) as you.

And yes, you will have to account for expenses related to land beautification (tractor, and implements, roads, driveways, tree clearing, etc.). Sculpting the land is a laborious and expensive feat.

 

[tb001]

OK, you're going to need about 3x as much as you planned for then....

Yes! I was going to suggest getting quicken and doing a serious analysis of spend, but you might not want to know how much those horses cost!!

 

[The Cosmic Avenger]

Not due if you retire. When I retired, my loan converted to a draw after 6 months. No penalties to draw from your 401K as long as you retired no matter what your age. I was 56 when I retired and my 401K loan was at age 50 when I built my house.

Not quite what the IRS says, although I wish you were right. (I've left the whole list intact because if I were you, I know I'd wonder if I missed something by just quoting part of it.)

Tax on early distributions. If a distribution is made to you under the plan before you reach age 59½, you may have to pay a 10% additional tax on the distribution. This tax applies to the amount received that you must include in income.
Exceptions. The 10% tax will not apply if distributions before age 59 ½ are made in any of the following circumstances:

• Made to a beneficiary (or to the estate of the participant) on or after the death of the participant,
• Made because the participant has a qualifying disability,
• Made as part of a series of substantially equal periodic payments beginning after separation from service and made at least annually for the life or life expectancy of the participant or the joint lives or life expectancies of the participant and his or her designated beneficiary. (The payments under this exception, except in the case of death or disability, must continue for at least 5 years or until the employee reaches age 59½, whichever is the longer period.),
• Made to a participant after separation from service if the separation occurred during or after the calendar year in which the participant reached age 55,
• Made to an alternate payee under a qualified domestic relations order (QDRO),
• Made to a participant for medical care up to the amount allowable as a medical expense deduction (determined without regard to whether the participant itemizes deductions),
• Timely made to reduce excess contributions,
• Timely made to reduce excess employee or matching employer contributions,
• Timely made to reduce excess elective deferrals, or
• Made because of an IRS levy on the plan.
• Made on account of certain disasters for which IRS relief has been granted.

 

[pb4uski]

....Both the DW and I want to retire to a house that fits us perfectly...

... DW and I want to retire to a house that that will work for us into our 80's...

Be real careful there. Your view of perfect is likely to change over time. I have a good friend who retired and razed his summer home and built a really nice year-round home that was perfect for them.

Fast forward 7-8 years... they grew to dislike Vermont winters despite living there since childhood and now snowbird between Vermont and Florida and are Florida residents. On more than one occasion he has stated that had he known then what he know no that he would have rebuild a much more modest house. We did something similiar and I can also say the same.

Plus, the landscape is littered with people who retired and bought or built their perfect retirement home and then moved after 5 years.

And don't get me started on [-]hayburners[/-] horses. Do you really think that you will want to take care of horses and ride in your 70s? DSIL loves horses and still rides competitively in her late 60s but I suspect that her desire will wane soon.

 

[Sniggle]

And don't get me started on [-]hayburners[/-] horses. Do you really think that you will want to take care of horses and ride in your 70s? DSIL loves horses and still rides competitively in her late 60s but I suspect that her desire will wane soon.

I know life would be much simpler, and the the search for land/house much easier without horses in the equation. The DW is only 50, and I do not see her deciding she can live without a horse in the backyard any time soon. I give her credit, as she rides and works with the horses consistently.

The positive is that I have been able to justify a tractor (Kubota B7800) to support the horses. I really like having a tractor

 

[scrabbler1]

Not quite what the IRS says, although I wish you were right. (I've left the whole list intact because if I were you, I know I'd wonder if I missed something by just quoting part of it.)

While not quite the same as those found on the list Cosmic Avenger quoted above, I realized another exception to the 10% additional tax when I cashed out a large portion of my retirement plan back in 2008.

What I cashed out was the company stock part of the plan. I used NUA, or Net Unrealized Appreciation. NUA allows me to use long-term cap gain rates for the value of the company stock above its par value. For me, NUA was about 97% of the total value, so most of the cash-out was taxed at the lower LTCG rates.

But what I didn't know at the time, and wasn't spelled out in my company's literature on the subject, was that any NUA is not subject to the 10% additional tax, no matter what your age is. When putting together my tax return the following year, I made this wonderful discovery, one which saved me about $29,000 in taxes I thought I was going to owe. The 10% penalty applied only to the par value, or for me the 3% of the total cash-out. The penalty was about $1,000.

 

[finnski1]

I know life would be much simpler, and the the search for land/house much easier without horses in the equation. The DW is only 50, and I do not see her deciding she can live without a horse in the backyard any time soon. I give her credit, as she rides and works with the horses consistently.

The positive is that I have been able to justify a tractor (Kubota B7800) to support the horses. I really like having a tractor

I have a 26 hp kubota myself and it has proven very worthwhile.
It cost $13000 but I probably have saved 2/3 or more of that over the past 17 years I have owned it just doing jobs myself that I didn't have to hire out. Plus it's fun.
I have several neighbors with horses. Some can barely afford them but it must be their passion and at least one where money is no object(she is one of those centi millionaires) and she even races them with her own team of jockeys, handlers etc.

 

[armor99]

Let me add a little.



- The land will be to build a house for retirement. Both the DW and I want to retire to a house that fits us perfectly, and building seems like the way to go. My approach is to buy the land first, spend about 1.5 years making all the decisions that are needed around the house, then getting it built to coincide with when I want to retire, in 2024 (Heck, I want to retire now, but could not make the sacrifices to make it happen. Buying a piece of land is usually a cash deal, especially with the market as it is today.



- It kills me to do the cash out. I moved my mortgage to a 15 year about 7 years ago, and seeing the principle go down quickly has been great. But I had no other way to get a $200K war chest, unless I wanted to raid the retirement funds and pay a 10% penalty. The only positive is that the rate for the cash out refi is actually slightly lower than the rate for the 15 year (2.875 vs. 3), and the lender pretty much paid the closing costs.



- DW has horses



- I will have $60k in pension, not including SSN.



- After all deductions, I bring home (net) $2600 every 2 weeks, or around $68000 annually, with anywhere between an extra $12K net in bonus, usually (although this year may not be so good).



- Standard expenses, monthly:

- Mortgage (+ I + PT) - $2300

- Cable/internet - $150 ($230-$80 megacorp for INT)

- Electric - $100

- Propane - $250

- Cell phone - $70

- Insurance (auto, life, Umb) - $300

----------------------------

$3170 going out each month, excluding food and misc.



- Difference ($6500-$3200) - $3300. This is a little bigger than I expected, as I had not run through the numbers in a while. Maybe I need to figure out where that money goes? I am guessing $1200 goes to food in the month, but that still leaves a lot left. hmmmm.....



- I guess I do need to figure out where that money goes. I have always been casual about money, except for the need to sock it away in savings, which I have done and managed very closely all my working life. I kinda know how much is in the checking account, and hope that there is enough to cover the bills. I will look if I am unsure, and do admit that over the last few years I have had to take out small loans from the 401k to bridge between December and tax refund to make ends meet. Yes, not the best strategy, and probably an anathema to most on this site, as so many of you know down to the dollar where your money goes. I need to do better.



- New Years resolution - I will track my family budget, figure out where the money goes, and hopefully make adjustments to expenditures. If I find a piece of land, I hope to do things to get it ready, to include putting up fencing before the building begins.



I do apologize for starting this thread, but it has been kinda cathartic and has caused me re-examine my situation. All good stuff.

I would highly recommend using an app called personal capital. It is free and tracks all of your spending, investments etc. After using it for a year, you can get a really good idea of how much you are spending on average, and where it goes...

 

[Morgan22]

Horses are like potato chips. You can't just have one. I say enjoy! (But look at my avatar, I'm biased.)

Just keep an eye on your expenses and cut back if you can.

 

[SVHoper]

Doesn't horses explain everything about the no cash

For us, it was 3 kids... as we got more above mortgage and 401k $, we just spent more on the kids (and renovations). We still didn't accumulate $$$ in the check account until kid expenditure started decreasing (post college).

 

[Retired Expat]

Not young, but certainly dreaming of retirement. I am in this weird place where my retirement savings are over $2 million, but I tend to just eek by each month on my salary. I am not saving a huge amount, about 15% in various places (401k, HSA, ESPP), but most of my modest income ($140k) is consumed with day to day costs. Yes, I know most reading this are thinking it is a spending problem, and you may be right, but we do not life extravagantly.

The weird thing is that once I retire in a few years I will have more money coming in than I do now.

I am thinking about this mainly because I am looking to buy a piece of land, and I am having to do a cash out refinance on my house to build the war chest.... frustrating when sitting on $2 million.

Guess this is more of a rant than anything else.

There might be options to use your retirement accounts as collateral for a short term loan. My brokerage firm recently gave me over 500k at 1.5% interest only for 3 years as a bridge loan to purchase a new property and renovate, then I can sell my current home and pay it off. No mortgage refi, appraisal fees or points involved. Good luck

 

[pb4uski]

I'm not aware of any way that one can use their retirement account as collateral for a loan... and I have looked. As I recall it is specifically prohibited About the best you can do is set up some systematic retirement account withdrawals and use that "income" to qualify for a loan.

 

[imnontrad]

Maybe it's time to dial back your retirement contributions to just meeting any match on the 401K (and maxing HSA if that is an option). Start building up a decent emergency fund and taxable portfolio. That may give you more options going forward including being able to retire earlier and spending a few years converting pre-tax to Roth.

 

[Tracer]

Not young, but certainly dreaming of retirement. I am in this weird place where my retirement savings are over $2 million, but I tend to just eek by each month on my salary. I am not saving a huge amount, about 15% in various places (401k, HSA, ESPP), but most of my modest income ($140k) is consumed with day to day costs. Yes, I know most reading this are thinking it is a spending problem, and you may be right, but we do not life extravagantly.

The weird thing is that once I retire in a few years I will have more money coming in than I do now.

I am thinking about this mainly because I am looking to buy a piece of land, and I am having to do a cash out refinance on my house to build the war chest.... frustrating when sitting on $2 million.

Guess this is more of a rant than anything else.

Buy yourself an immediate annuity and give yourself a raise. You'll have that extra income coming in now and in retirement.