I am 59 years old and married. I worked for the federal government for 31 years making $116,000 a year. My wife makes about $55,000 a year. I am considering retiring within the next four years and my wife of 57 years will probably retire after I do.
My wife and I own properties in both New York City and Pennsylvania. Our home in New York has no mortgage and is a multifamily property. Property taxes on the home are $6,700 and homeowners insurance is $1,700 per year. My wife and I live in one unit ourselves and rent out the second unit, with a monthly rental income of 1,800 yuan.
Additionally, the basement portion of the unit where my wife and I live generates approximately $15,000 per year in variable rental income through the short-term rental service Airbnb. The federal agency where I am employed is also located in New York City. Less than two years ago we purchased our second home in Pennsylvania. Its 30-year mortgage is $484,000 with an interest rate of 6.2%, property taxes are $6,500, and annual homeowners insurance is $1,200.
My wife and I own a nine-year-old car. We also got full coverage car insurance in Pennsylvania for $1,200 per year, which was much less than the cost in New York City. I have a credit card with an average monthly balance between $1,200 and $1,500 that I pay in full each month. My employer provides a commuting allowance. I eat breakfast at home and take my lunch to work. I’m not an impulse shopper.
My wife and I rarely eat out, usually only on special occasions like birthdays, Valentine’s Day, Mother’s Day, and wedding anniversaries. The original purpose of purchasing a home in Pennsylvania was to receive favorable state tax treatment for my federal pension. However, I’m not sure it’s prudent enough to make additional housing investments so soon before retirement.
I am investing in my employer’s 401(k) retirement plan (Thrift Savings Plan), which currently totals $1.6 million. For several years, I have been investing 30% of my annual salary (including the maximum annual catch-up contribution) into the plan. My investment allocation in my 401(k) plan is 90% stocks and 10% time target funds.
My projected monthly pension at age 62 is $3,589 (excluding survivor benefits), or $3,230 (including survivor benefits). My projected monthly Social Security benefit at age 62 is $2,400. I can keep my health insurance (currently costing $548 per month) for my wife and myself until retirement and until we qualify for Medicare (the same annual rate federal employees pay).
One major financial resource that was clearly missing from my financial situation was liquidity or a cash buffer. I don’t have the recommended 6 to 12 months of emergency cash reserves. So I’m considering putting a second home on the market to give myself the emergency cash cushion I need.
I found myself at a crossroads: either take on high mortgage debt, exposing us to significant financial risk, or increase our liquidity so that we would be better able to handle major financial events during retirement. Your help will be greatly appreciated.
husband
Related: “When he doesn’t get money, he gets angry”: My brother lives a life of chaos and financial ruin. What are my ethical obligations?
You rarely eat out, but your mortgage payment is approximately $3,600 per month, including interest, property taxes, and insurance. This makes sense if you can recoup the money through increases in property value or rent. You’ll be 89 when the 30-year mortgage is paid off, but if you’ve already had second thoughts about buying the property, you probably don’t expect to hold on to the property that long.
A rule of thumb when buying or selling a property is to wait five years to pay your closing costs, which can be considerable. Let’s say you sell your home for $650,000. Most of the profit will be offset by a 6% real estate agent commission ($39,000), a 1% state tax ($6,500), title fees, and attorney fees (approximately $1,000 and $3,000, respectively). That equates to nearly $50,000 before you pay for moving services.
You didn’t specify whether you were buying the property as a vacation home so you could get out of the city (which seems most likely) or renting it out. But I’d recommend the latter, given the cost, and the fact that you’ll be ready to retire at age 65 and qualify for Medicare (Medicare has its own set of fees). If you can pay your monthly bills, renting the property can buy you time to decide when to sell.
Homes in Pennsylvania carry huge mortgages. With so little time until retirement, this is a significant expense, especially if the property doesn’t generate any rent. Therefore, holding it during early retirement could put a strain on your cash flow, especially if you have other unexpected expenses or the market declines during your early retirement. You don’t want to be forced to withdraw funds from your retirement account before you have to start taking required minimum distributions.
At an extra $400 a month, I’m not sure it’s worth it to receive a pension with no survivor benefits. This is obviously a gamble because we don’t know if you will outlive your wife or if she will outlive you. How long we live depends largely on a variety of factors, including genes (your parents’ lifespan is a blunt tool for making predictions). You are two years older than your wife, and women tend to live about five to six years longer than men. But anything can happen. This is a tricky risk assessment.
Regardless, your retirement is in good shape. When you turn 62, your 401(k) may be worth close to $2.1 million. At a 4% withdrawal rate, that would give you more than $83,800 per year while helping maintain your retirement fund, assuming an annual return of 7% (or 5% after inflation). Add in your $40,000 annual pension, $28,800 in Social Security (you can delay filing to increase your monthly benefit amount) and $20,400 in net rent, and you have a very respectable retirement income of $176,000, not counting what your wife brings in.
If you absolutely love the time you spend in your Pennsylvania property and it significantly improves your quality of life, then at least hold on until you retire. Then weigh whether you are willing to continue spending $3,600 per month on the property. If you stick with it long enough, you’ll likely make your money back and maybe a little extra. Real estate prices in the state are rising 5% annually, although some might say that’s optimistic.
You did a lot of things right: You invested in your 401(k) at a young age, had $2 million by retirement, and paid off your credit cards every month. Paying double-digit credit card interest rates is one of the worst ways to give money away. However, if your reason for owning a second home is to provide better tax treatment for your pension and better car insurance rates, it’s probably not worth it in the long run unless you’re very lucky in the property market there.
Still, you made a good choice. Cheers to your retirement!
Related: ‘I didn’t ask a man to rear-end my car’: Social Security is replacing my disability benefits. Is the foundation short of money?
More columns from Quentin Futrell:
“I don’t own a house”: I’m 62 years old, unemployed, and have a $1.5 million pension. Can I divorce my husband?
‘My parents begged me never to leave him at home’: I have spent my entire life caring for my disabled brother. Am I doing enough?
Can I prevent my children from using their heritage to support political causes that I strongly oppose?