FIRE'd and Now Buying a New Home?!?

[CountingDown]

Well...after consuming 8 years of posts from you very generous and knowledgeable members I pulled the plug last February and retired at 60. Not really early but very happy with my decision. Many thanks to you!!!

I now have a question about withdrawing funds in the most tax-efficient manner to purchase what will hopefully be our forever home (with my DP of 30 years). If this needs to be moved to another thread please advise.

Current Assets (me):
401K $1,550,000 ($490K after tax)
Pension (cash value) $ 115,000

Fido Taxable $ 670,000
Fido Trad IRA $ 50,000
Fido ROTH IRA $ 250,000
Fido Inherited IRA $ 20,000

Indiv Stocks (DRIPs) $ 360,000

Variable Annuity $ 110,000

HYS & CDs $ 400,000

TOTAL MIX IS 45/45/10
--------------------------------------
Current Assets (DP age 57):

401K $ 550,000
Co Stock $ 330,000

Fido Taxable $ 535,000
Fido ROTH IRA $ 75,000
Fido SEP IRA $ 705,000

Indiv Stocks (DRIPs) $ 150,000

HYS & CD $ 97,000

TOTAL MIX is 80/15/5 (time to rebalance)
------------------------------------------
Combined investable assets approximately $6MM
Current House Value approximately $400K

DP is still working and salary is $110K and will likely retire in the next 2 years. We've both been savers and believers in LBYM for decades and decided we want to buy our forever home.

Est SS at FRA me: $3100/month
Est SS at FRA DP: $2600/month

Targeted home price: $1.3 MM
We are preliminarily approved for a mortgage of $1MM (gulp) at under 3%. With a $300K down payment, monthly payments including RET & Ins would be approx $5200.

All calculators (including FIRECalc) indicate that we can afford this but I'm unsure as to where to pull the initial down payment and how much. If we get approx $400K from our current house we will recast the mortgage to lower the payments. No debt. No heirs (will leave remaining assets to charity). Current expenses including taxes & healthcare (current on DPs plan) are approx $80K/annually.

Trying to not create a tax event should we put more down initially and whether we should even do that with interest rates where they are now.
Your thoughts are much appreciated.

 

[finnski1]

At 80k expenses on 6m is only a 1.33% wr. That looks excellent!
So it looks like you won't realize the 400k till after you purchase the new home. Please take the following thoughts as just off the top of my head ideas and seek out someone more knowledgeable about any of them. You may receive some advice from some on here much more up to date on any of these.

1) At first I thought you could take a loan from your 401k's but I think the limit is only $50k (although the CARES act extended this to $100k temporarily) and you have to pay it back with after tax dollars which then means you are taxed again on the future when you withdraw from the 401ks in retirement.
On the plus side the"interest" you pay is actually paid back to you and your own account this is no real"interest penalty" to do this.
It might be worth investigating further and run the numbers and tax implications to see if you can at least reduce other withdrawals for tax reasons. I actually did this 22 years ago when building my house and I got really lucky in that the period of a few years when I took it out was just before the market kept going down and I was paying myself back in to lower cost acquisition of mutual funds



2) Can you sell your 400k house first , then rent and take advantage of the capital gains exemption for selling your primary house (I believe it's 250k per individual or 500k per married couple)

3 You could withdraw most or allow of your roths though I personally would hate to do that because you now forfeited all the advantages and future tax free returns. Ouch.


4) Can you secure a short term bridge loan for your down payment, thus eliminating any tax able withdrawals and just pay off that bridge loan when the first house sells. I know they have higher interest rates and borrowing costs but may significantly reduce a much larger taxable withdrawal.

 

[bloom2708]

$5,200/month new mortgage after retirement? I can't help much.

Buying too much house can derail your plans at any age and work status.

I would sell your first house. Then use taxable to get the mortgage down to the $400k to $500k mark.

I mean I wouldn't buy that much house, but that is something else.

Good luck!

 

[OldShooter]

... Can you secure a short term bridge loan for your down payment, thus eliminating any tax able withdrawals and just pay off that bridge loan when the first house sells. I know they have higher interest rates and borrowing costs but may significantly reduce a much larger taxable withdrawal.

We are doing exactly this as we begin to build a second lake home across the lake, near family and friends. Through several transactions we will eventually see a "family compound," various family owning various contiguous pieces of land along 1/4 mile of premium lakeshore. For us it's definitely a "blow that dough" scenario.

Here's how our deal runs: We are getting a 30 year cash-out mortgage on the current lake home. Rate is 2 7/8% w. $3K closing costs. We have also freshened up (reduced % rate) an old, unused for 5 years, HELOC on our city house. IIRC the rate is one over prime. We will use these two pots as sources of cash to buy the land and build the house. Then when we are ready to move we will sell the current lake home and use the proceeds to cover most of the loans. The balance we need will then come from our tIRAs. The two deals are with different banks due to pre-existing relationships. DW is friends with the president of the bank doing the mortgage so we are getting VIP treatment. The HELOC is with a bank I have used for business financing mostly, 30 years history. We are also getting handled through their "wealth" division and supposedly better service, though I am not so sure. I mention the relationships because someone just walking through the doors cold might not get the same treatment or the same rates. But, really, rate differences don't matter much when we need the money worst-case for a couple of years.

HTH

 

[freedomatlast]

I'm about the same age as you with slightly less in investment assets and we just bought a house worth twice what our old house sold for. We had been planning to do this for a few years, so we had the cash waiting in low yield, liquid accounts. The lifestyle change for us has been great and has made no difference in how much we will continue to spend each year. If this is your dream, go for it. You can afford it.

 

[CountingDown]

Hi Finn, thanks for your thoughts. I don't think we have 2 moves in us to sell and rent and then move again. We did consider a bridge loan but I'm thinking of putting down less from liquid accounts (HYS & CDs maturing) and then recasting the mortgage after we sell our current house as we'd like to lock into the interest rates below 3% if possible. Anyone familiar with recasting?

 

[CountingDown]

$5,200/month new mortgage after retirement? I can't help much.

Buying too much house can derail your plans at any age and work status.

I would sell your first house. Then use taxable to get the mortgage down to the $400k to $500k mark.

I mean I wouldn't buy that much house, but that is something else.

Good luck!

Bloom, I agree this sounds like a stretch to me too although the numbers seem to work. My goal was to not have a mortgage in retirement but we're not spending our assets on anything else at this point.

 

[CountingDown]

We are doing exactly this as we begin to build a second lake home across the lake, near family and friends. Through several transactions we will eventually see a "family compound," various family owning various contiguous pieces of land along 1/4 mile of premium lakeshore. For us it's definitely a "blow that dough" scenario.

Here's how our deal runs: We are getting a 30 year cash-out mortgage on the current lake home. Rate is 2 7/8% w. $3K closing costs. We have also freshened up (reduced % rate) an old, unused for 5 years, HELOC on our city house. IIRC the rate is one over prime. We will use these two pots as sources of cash to buy the land and build the house. Then when we are ready to move we will sell the current lake home and use the proceeds to cover most of the loans. The balance we need will then come from our tIRAs. The two deals are with different banks due to pre-existing relationships. DW is friends with the president of the bank doing the mortgage so we are getting VIP treatment. The HELOC is with a bank I have used for business financing mostly, 30 years history. We are also getting handled through their "wealth" division and supposedly better service, though I am not so sure. I mention the relationships because someone just walking through the doors cold might not get the same treatment or the same rates. But, really, rate differences don't matter much when we need the money worst-case for a couple of years.

HTH

Old Shooter, we have a HELOC on the current home (no mortgage). A cash-out mortgage would only apply if we had a current mortgage correct?

 

[CountingDown]

Freedom, thanks for the vote of confidence. Our initial thought was to use a good chunk of HYS and CDs for the initial down payment (maybe $400K) and then apply the approx $400K from our house sale to recast. I will sell a couple of stocks at a loss this year to offset capital gains and enough gainers to pad the first bucket. Just trying not to trigger any major tax events.

 

[statsman]

I don't think we have 2 moves in us to sell and rent and then move again.

Why not? I think it would give you more flexibility at not going with a house you decide is okay because of timing. We moved out of state, and we rented for the first 7 months before moving into a new house. I disliked the double move a lot, but it was the right decision for us. At the time of moving into the new house, I was 60.

About taking on another mortgage, even with assets far above most here, I am not sure I could do it.

 

[Sniggle]

You have saved a bundle of money, you want to have a home that makes you very comfortable in your retired years, seems to me there should be nothing stopping you.

My DW and I are going down the same kinda road, although with significantly fewer assets than you have. Like Old Shooter, I did a cash out refinance to buy a piece of land, and will begin to build the house in 3 years when I hit 59.5 and can access funds without penalty. I am not afraid of having a mortgage into retirement, and look forward to the whole process, although I know at times it will be stressful.

You can't take it with you, and your heirs will benefit the same if it is in home equity or equities.

 

[finnski1]

Hi Finn, thanks for your thoughts. I don't think we have 2 moves in us to sell and rent and then move again. We did consider a bridge loan but I'm thinking of putting down less from liquid accounts (HYS & CDs maturing) and then recasting the mortgage after we sell our current house as we'd like to lock into the interest rates below 3% if possible. Anyone familiar with recasting?

Yes moving twice (possibly in less than a year)would not be fun.
I have no experience with recasting a mortgage.
Even though 1.3 million is a lot for a house( or not depending where you live) it is still only about 22% of your liquid assets and then you will get back 400k so the net is maybe 15% of you NW to get your dream house. 5.1 million would easily get you 120 to 150k per year safely although you may need it for that expensive house

Well above your present 80k burn rate and that only has to carry you 2 to ss FRA age which is only about 6 years away.

You seem to be golden to me whichever way you suss this out.

Enjoy the rewards of great wealth building!

 

[cat4ever]

I'm curious about reluctance to take on a mortgage in retirement expressed by some. I always saw that as a way to reduce taxation by being able to spread among many years what would otherwise cause a very large withdrawal in a single year at a likely high tax bracket rate if you were to buy a house with cash. Am I missing something?

 

[tb001]

I'm curious about reluctance to take on a mortgage in retirement expressed by some. I always saw that as a way to reduce taxation by being able to spread among many years what would otherwise cause a very large withdrawal in a single year at a likely high tax bracket rate if you were to buy a house with cash. Am I missing something?

Not to me. At current interest rates, this was our attitude as well. Look at firecalc results with/without a mortgage as off chart spending and be sure to make it not inflation adjusted.

If you’re stretching on budget, I can see being worried about it, but it doesn’t sound like that’s the case for OP.

My only question would be if the new house changes your spend significantly. Ours did, but so far well worth it. More switching costs than we anticipated, as we’ve done improvements on the house, but they have been discretionary and the funds have been there.

 

[OldShooter]

Old Shooter, we have a HELOC on the current home (no mortgage). A cash-out mortgage would only apply if we had a current mortgage correct?

Sorry I was not clear. Our cash-out mortgage will be on our lake home. The HELOC is on the city home which, like yours, does not have a first mortgage.

FWIW, a HELOC is a mortgage, sometimes referred to as a second mortgage. Where there is no first mortgage IANAL but I think the HELOC ends up on first position. Then if the owner wants to add a first mortgage, the HELOC mortgagor would have to subordinate. If you want to do something like this, your HELOC mortgagor should probably be your first choice.

 

[finnski1]

Hi Finn, thanks for your thoughts. I don't think we have 2 moves in us to sell and rent and then move again. We did consider a bridge loan but I'm thinking of putting down less from liquid accounts (HYS & CDs maturing) and then recasting the mortgage after we sell our current house as we'd like to lock into the interest rates below 3% if possible. Anyone familiar with recasting?

When are you actually planning to purchase the new home?
Perhaps you could get the purchaser of your present home to let you stay there and rent until you move to the new house. Therefore only one move.
Then use the proceeds as your down payment.
Or possibly offer the purchaser of your present home some sort of discount on the price to allow a delayed closing date. Again allowing those proceeds to be your down payment on the new place.
Perhaps one of those 2 options would work depending on the time frames from selling your present house and moving to the new one.
Both would allow the capital gains exclusions without withdrawing any taxable funds. I think?

 

[W2R]

All I can say is that I am SO glad I didn't take on a big mortgage when I bought my retirement home. In these uncertain times, just reading the news is unsettling for me, to say the least ; having a paid off home gives me great sleep-at-night value. YMMV and obviously does for the OP and many others.

My present home is my retirement home, and I call it my Dream Home. I bought it in cash which I had saved up during several years while I was searching for the perfect house for my needs and wants. Much of that cash came from portfolio yields that were not re-invested, so that helped a little with the tax situation.

I was able to move directly into my Dream Home in the summer of 2015, about a week after buying it in an all cash transaction. Then I sold my previous paid off home (quickly, due to the hot market at that time), and returned the proceeds to my portfolio.

As to the OP's situation, I wish my comments could be more helpful but all I really can relay is my own experiences. Good luck and I hope you figure out the best path through the labyrinth of decisions that you may or may not encounter.

 

[CountingDown]

When are you actually planning to purchase the new home?
Perhaps you could get the purchaser of your present home to let you stay there and rent until you move to the new house. Therefore only one move.
Then use the proceeds as your down payment.
Or possibly offer the purchaser of your present home some sort of discount on the price to allow a delayed closing date. Again allowing those proceeds to be your down payment on the new place.
Perhaps one of those 2 options would work depending on the time frames from selling your present house and moving to the new one.
Both would allow the capital gains exclusions without withdrawing any taxable funds. I think?

Finn, we’re flexible on timing so these are possibilities. Thanks!

 

[cat4ever]

All I can say is that I am SO glad I didn't take on a big mortgage when I bought my retirement home. In these uncertain times, just reading the news is unsettling for me, to say the least ; having a paid off home gives me great sleep-at-night value. YMMV and obviously does for the OP and many others.

You make a good point. I think in these times of seemingly un-ending good market news one can get a little cavalier about the value of cash in the bank and full home ownership. You just never know what's going to be the best move until you look back and think "what the hell was I thinking?".

 

[CountingDown]

All I can say is that I am SO glad I didn't take on a big mortgage when I bought my retirement home. In these uncertain times, just reading the news is unsettling for me, to say the least ; having a paid off home gives me great sleep-at-night value. YMMV and obviously does for the OP and many others.

My present home is my retirement home, and I call it my Dream Home. I bought it in cash which I had saved up during several years while I was searching for the perfect house for my needs and wants. Much of that cash came from portfolio yields that were not re-invested, so that helped a little with the tax situation.

I was able to move directly into my Dream Home in the summer of 2015, about a week after buying it in an all cash transaction. Then I sold my previous paid off home (quickly, due to the hot market at that time), and returned the proceeds to my portfolio.

As to the OP's situation, I wish my comments could be more helpful but all I really can relay is my own experiences. Good luck and I hope you figure out the best path through the labyrinth of decisions that you may or may not encounter.

W2R, I have been in your camp for many years and never planned to take on a mortgage after retirement. If we take take HY savings, CDs and a balance of other investments we will also return the proceeds from the sale of our house to our portfolios. Believe we are in a position to do this but there is a distinct change of mindset after having no debt for many years. Thank you for your perspective.

 

[ERD50]

Another option to consider is a Line-of-Credit against the stocks you own. I just got this approved for ourselves in anticipation of a local move, and we want the flexibility to buy before selling our current home, and not take a tax hit pulling funds out (we will get a low rate fixed mortgage after 1st house sells).

Fidelity only offers margin lending at pretty high rates, but Etrade offered low rates as a Line-of-Credit, close to the current mortgage rates (but variable of course).

-ERD50

 

[latexman]

Anyone familiar with recasting?

Yes. We recently downsized the 6 BR kid hotel (5 kids at it's max) to a 3 BR (MBR on ground floor) forever home. I was/am still w*rking and easily qualified for two mortgages. Once the old home closed, I called up our new mortgage loan officer and asked him to recast the new mortgage. He knew this was coming from our initial planning. It was very easy. I gave him a check for about the proceeds amount on the old house, and shortly after I received a much reduced new mortgage payment. I don't think there was any new documentation to sign, if there was it was minimal. It happened so quickly, I never had to pay the first big payment on the new mortgage.

I'm a fan of recasting and would do it again, if needed.

 

[CountingDown]

Another option to consider is a Line-of-Credit against the stocks you own. I just got this approved for ourselves in anticipation of a local move, and we want the flexibility to buy before selling our current home, and not take a tax hit pulling funds out (we will get a low rate fixed mortgage after 1st house sells).



Fidelity only offers margin lending at pretty high rates, but Etrade offered low rates as a Line-of-Credit, close to the current mortgage rates (but variable of course).



-ERD50

ERD, We do have an E*TRADE account so I’ll check into this as well. Lots of options so just trying to narrow them down. Thanks!

 

[CountingDown]

Yes. We recently downsized the 6 BR kid hotel (5 kids at it's max) to a 3 BR (MBR on ground floor) forever home. I was/am still w*rking and easily qualified for two mortgages. Once the old home closed, I called up our new mortgage loan officer and asked him to recast the new mortgage. He knew this was coming from our initial planning. It was very easy. I gave him a check for about the proceeds amount on the old house, and shortly after I received a much reduced new mortgage payment. I don't think there was any new documentation to sign, if there was it was minimal. It happened so quickly, I never had to pay the first big payment on the new mortgage.

I'm a fan of recasting and would do it again, if needed.

Latexman, this is more in line with what we were thinking but do not know of anyone who has done this... until now! Initially I would rather not use all of our cash reserves in addition to cashing out too much in taxable accounts for a larger down payment (and causing a larger tax bill).

While interest rates are so low I like the option to lower the payments after the sale of our house. We could afford the payments for the early years and pay down gradually from there (more when SS kicks in for me). I’ll be doing some ROTH conversions and could turn on a small pension of around $700/mo in a couple of years.

Just trying to figure out the right order in which to pull the funds. Also talking to my CPA next week but you and others have given me some ideas to consider. I love the diversity of thought and opinions on this board as I have learned so much over the last several years. Thank you!

 

[cat4ever]

Etrade offered low rates as a Line-of-Credit, close to the current mortgage rates (but variable of course).

-ERD50

I have accounts at E-Trade, but for the line of credit they won't let you use IRAs as collateral, and I don't have the required 50K in a non-IRA account. If I were to add enough to get to 50K what would the max loan I could get likely be? Would I have to maintain 50K in the account?