My retirement dilemma - HELP! (Update)

[seriousthistime]

In the "If you were Doxie, what would you do?" thread, I mentioned that Doxie's situation made me think about what I should be doing for retirement. I think it was Daphne who said that I might want to start a new thread.

I just turned the big 6-0. I have a stable job; however, it is tied to my boss being there and if he retires (which he will, I don't know when) I will get a one-year grace period and then I'm out unless I find another position within the organization.

I went through a long and costly divorce that resulted in me taking on a lot of debt. I have been trying to focus on paying off the debt, contributing to my 401(k) plan at least enough to get the employer match, and take care of some medical expenses. In other words, I am doing a little of this, little of that, all with the hope of better positioning myself for retirement, which I hope will not be for another 6 years.

With all the advice that you folks were giving Doxie in her downsizing thread to hoard cash and just pay minimums on the debt, it dawned on me () that maybe I should be taking the same advice.

Here are the big and ugly numbers. I suppose I should be pleased I am not one of those people who doesn't have a penny saved for retirement. However, I am only one step above that.

$37K in IRAs (traditional and Roth)
$98K in the 401(k)

I qualify for a defined-benefit pension. It would be:
Retirement at 62, $850 per month.
Retirement at 66, $1,250 per month.

Social security would be:
Starting at 62, $1250
Starting at 66, $1,925 per month.

I can keep the my employer's health insurance for $85 per month. I can also use the 401(k) to purchase an annuity which would give me $900 per month income with $160K in the plan and retirement at 66. I would have $160K in the plan by then if I do nothing more than I am doing right now - 5% contribution, 5% match, and assuming no significant swing downward in the market.

The big variable is my share of my XH's defined-benefit pension. If he retires when I am 66, my share of his pension would be $3,850 per month. If he retires tomorrow, I would receive more like $3,800 per month (starting right away). It doesn't change much because I will receive an increasingly smaller piece of an increasingly bigger pie as he continues to work. He could decide to die at his desk and screw me out of retirement. He is the sort to do that. But I know he is miserable at work, so I'm not sure he would. If he dies, I get no retirement benefits from him. But I have a $650K life insurance policy (which I own and am beneficiary of, so he can't change the beneficiary). He gets no share of my pension because I was not vested for much at the time we divorced, so I bought him out.

I own a house with about $55K in equity right now. My hope is to pay off all debt except the mortgage (but including HELOC) before I retire so I have only the mortgage to worry about, which with taxes and insurance would be $1200 per month. The house is suitable for me as I get older, but it is not where I hope to live for the rest of my life.

So, I guess my question is, should I scale back on debt reduction and throw more money into retirement? What other information do you need to know?

[IPAfan]

Honestly you look like you're doing just fine to me. You have very little in your retirement accounts, but between your SS, pension, and your share of DH's pension and/or life insurance proceeds, you should be fine unless you live in a very HCOLA.

The one thing..if you do have to retire early from your current job, I'd recommend trying to find something to hold you over until you hit 66 to start drawing SS. You might even take 401k withdrawals to survive until you hit 66 so you could get a higher fixed income through SS.

What sort of debt do you have OTHER than the mortgage. How much is the mortgage, and what's your monthly payment? I know you have 50k of equity, but it might be a good time to refinance BEFORE you lose your job or retire and while interest rates are low.

[seriousthistime]

Thanks beerfan.

I refi'd the mortgage a few years ago. It's at 4.875%. I'd assumed that with $2K in closing costs added to the current $135K I owe, and if I made payments to pay it off in 28 years (to reflect where I'll be if I don't refi again), it would come out about the same. It doesn't. It actually saves me about $50 per month. So thanks for the suggestion. Mortgage payment is now $740, taxes and insurance another $500, HELOC is about $250. I do live in a relatively LCOLA, but obviously property taxes are high here.

Credit card debt is $31K (all at low rates), HELOC is about $36K at 3.25% variable, and car loan is about $10K, also at a low rate. I would like to find some other work if I have to retire early.

[Gardening Grandma]

So, I guess my question is, should I scale back on debt reduction and throw more money into retirement?

What other information do you need to know?

I would need to know the debt details. Total amount, interest rate, term and min payments.

One comment - I would not plan on a retirement that is based on anything from the XH's pension. It is too uncertain. Needless to say, my goal would be to continue working beyond 66 in order to increase the SS payout and to decrease the amount needed in the 401K. While I don't think you are "doing just fine", things actually could be much worse.

Another question - when you do draw SS, it will be based on the larger of either your earnings or 1/2 your XH's benefit (I am assuming you were married at least 10 years). Have you run the numbers to see which is larger?

We posted at the same time - thank you for the additional info. I'd be very uncomfortable retiring with that amount of debt. Since all the debt is at "low rates", I think I'd put as much as possible into the retirement savings. How do you have the retirement savings invested?

Also, if you are forced to retire earlier than 66, I'd look for a part time job rather than draw down the retirement savings. If you aren't too picky, part time jobs are relatively easy to find. The longer you hold off drawing SS, not only does your benefit get larger, but the cost of living adjustments are larger too since they are based on your benefit. So it is well worth waiting if you can manage it.

[busymom]

The only suggestion I would make would be to postpone retiring, (if your health is good) even if you need to take another job as beerfan has suggested. I'd put off filing for social security as long as you can. I think you're making the best of a difficult situation.

[Gardening Grandma]

I qualify for a defined-benefit pension. It would be:
Retirement at 62, $850 per month.
Retirement at 66, $1,250 per month.

Social security would be:
Starting at 62, $1250
Starting at 66, $1,925 per month.

Assuming you retire at 66 with a gross monthly income of 3175. Have you worked up a budget planing how you could live on that and keep up with the debt payments?
What percentage of your current income does this replace? Could you live on a gross income of 3175 now?

[IPAfan]

After seeing your debt picture I think you should keep saving/investing for now. If the interest rates become unreasonably high then consider paying them off.

Another option, probably frowned upon, and most likely unnecessary, would be to get rid of the non-house debt with bankruptcy. Again, I don't think you NEED to do this, but if you were to lose your job, you could probably get rid of all your CC debt which is fairly substantial.

Again, you don't NEED to declare bankruptcy, and I don't think you ever will. But it might be an option to slightly improve your financial situation. In your situation I'd probably just handle the debt, try to keep it current so long as the interest rate is reasonable, etc. Put as much money in retirement accounts as possible, especially since you can now withdraw that money with no penalty since you're over 59.5.

Also, consider putting the money in a 401k or pretax account. Keep in mind that your income might drop substantially for a few years if you lose your job and decide to wait a few years to start collecting SS. So if you put money in the pretax account NOW you save money on taxes, and then get to withdraw at a lower tax rate (with no penalty) as soon as you need the money over the next few years. My parents in this situation now...they could start collecting SS now, but I think they are trying to wait until they can get the full amount. Since they has very little if any income coming in, the withdrawals from 401k accounts are probably being taxed at a very low rate compared to what they were paying even a couple years ago.


EDIT:

Also, with the X-pension...I think this needs to be factored in. OF course he could die and you're left with nothing, but OTOH you have a substantial life insurance policy. I'd rather have $650k at 65 than $3,850 a month. You could probably invest $650,000 in dividend paying stocks and get about $20,000 a year in income in year one that should be able to grow by 8% annually. We're not talking about stock prices or gains here at all...just the dividend stream which is usually much steadier especially with blue chip stocks like, e.g., PM, PEP, INTC, PG, JNJ, IBM, T, MO.

[seriousthistime]

Okay, more questions to answer. Thank you, everybody!

XH is a government worker (highly paid, obviously, and will max out the benefits at 80% of salary). He remarried within a month of our divorce. She is the one who must be designated as the survivor and will either receive partial pension benefits or cash payment when he dies. There were not enough marital assets for me to get a cash equivalent payout when we divorced. I did not ask for maintenance but if I were to do it over I would probably ask for maintenance to begin when I turn 66, if he had not retired by that time. Whether that would fly is questionable.

My car payment is $249/mo; I have about 4 years to go and the interest rate is low so this is low priority for accelerated payoff. The car is a 2004 Honda with about 30K miles. Credit card debt varies from 0% to 5.9%. (I could add up the minimums but I am paying so much more than that right now that I really have no idea. Shall I dig out the info? Does it make a difference?) CC payoff is my major focus at this point. Then to HELOC. If I can keep working until 66, all CC, HELOC, and car will be paid off. At the rate I'm going, the car will have about 100K miles on it by then, still a lot of life left.

XH will not get much from SS. His government income was not subject to SS. Mine is by far the larger of the two.

Another thing: I was married before this XH, for more than 10 years. I understand that if 1st XH dies I am eligible to receive the SS survivor's benefit on his account because I am now 60. That might be approximately what I would get on my own account at age 62 (but I really have no idea because I don't know what he made). And do I understand correctly that I could collect that amount until I am age 66-70 (in that range), and then collect the higher benefits on my own account?

[seriousthistime]

Assuming you retire at 66 with a gross monthly income of 3175. Have you worked up a budget planing how you could live on that and keep up with the debt payments?
What percentage of your current income does this replace? Could you live on a gross income of 3175 now?

If I retire at 66 at $3,175/mo, I will have no debt payments other than mortgage. Or alternatively I will have more in my 401(k) which means more income than $3,175. And $3,175 is slightly more than what I take home now. Expenses would be lower - no professional wardrobe, more meals at home, by then my medically needy dog will be gone (not hurrying her along by any means; just sayin'), and I would take a slash-and-burn look at the budget. Could I do it? Yes, but it would hurt. I'm trying to figure out how much I want to hurt now so I can put more money in retirement AND pay off the debt.

And yes, part of my thinking is that if I needed to, I COULD always discharge the CC debt in bankruptcy. However, I can't do that if I hope to get another job in my field.

[cronewitch]

Consider a roommate if not now when you are retired. If you were forced out before 62 so you didn't get your 850 pension and other things went badly it could make the difference. If you did a golden girls type living with 3-4 women in the same house even if you only charged the other 2-3 600 a month you would get 12-1800 a month income for little cost to you. Retire at 70 and you could live on SS alone if you had roommates be rolling in money and any pensions or savings used for wants.

For now I would look at updating job skills so if your boss retired tomorrow you would be ready to land a new career level job.

Maximize income and minimize spending and it doesn't make a huge difference if you save the extra or pay down debt but I would pay down the debt in the order of interest rate so 5.9% first and save the mortgage for last. Paying an extra amount on the mortgage doesn't reduce the next month's bills where paying off a HELOC or car does.

[phil5185]

I can keep the my employer's health insurance for $85 per month. I can also use the 401(k) to purchase an annuity which would give me $900 per month income with $160K in the plan and retirement at 66.

You already have the two annuities - DB & SS - rather than putting all of your eggs in one basket, it might be better to retain control of the $160,000 - someday you might need a lump sum. You could invest it in something like 6% bonds and get $800/m - and still own your $160,000.

[Deleted]

Personally I would not worry about your XH dying before retiring because of that 650k life insurance policy.

That is a pretty good cover (smart girl) and make sure you keep paying that every month as if it were your mortgage.

When does it expire?

[seriousthistime]

Excellent thought, Phil, about the money in the 401(k).

Crone, thanks for the idea about roommates. If it comes down to that, I will have to be cautious about finding someone financially and emotionally stable enough to share my space with. My sister took on some roommates and they turned out to be the roommates from hell. They are extremely messy, like to party, and hang around with low-lifes. I see from her situation and people I work with that just because people are a certain age it doesn't mean they are through with the drama; in fact, some people seem to crave it.

Cawiau, the life insurance policy is in effect for another 17 years. After that I will be SOL, but if he retires before that I will take his pension money and sock most of it away (pay off the mortgage, invest the rest, enjoy some of it) so if he dies after the policy term ends I will be okay. I am a few years younger than he is so the odds are in my favor both as to his pension and his life insurance. I pay the premium twice a year and I put a prorated amount into savings every payday.

[Gardening Grandma]

You could invest it in something like 6% bonds and get $800/m - and still own your $160,000.

The only way to get 6% in bonds is to put the investment into the lowest grade (aka "junk") bonds and go out mid term. That is a very risky step for one's life savings and personally I would not do that with 100% of my nest egg. I might put a percentage into junk bonds but not 100%.


If I retire at 66 at $3,175/mo, I will have no debt payments other than mortgage.
Or alternatively I will have more in my 401(k) which means more income than $3,175. And $3,175 is slightly more than what I take home now.

Well, the 3175 is gross. There would be no payroll taxes coming out but you'd owe federal income tax (I'm assuming you'd be in the 15% tax bracket) so your net would be closer to 2699. How does that compare with what you take home now?

If you pursue the debt payoff route, then at retirement you'd just have your mortgage (and other living expenses), but only $160K in your nest egg. Although your car would be paid off, it would be 13 years old with about 100K miles, so you'd probably be looking at replacing it. Could you afford a car payment on a net of 2699?

There's a common wisdom that you can spend less in retirement. Our own experience has been that while some costs go down, others go up and it's been a wash. Your current healthcare premium is $85/mo, right? (A bargain but I would not count on it remaining the same. DH's premium (he's too young for Medicare) has quintupled for next year (from $32/mo to $172/mo) even though it is subsidized by his previous employer.

If you could put $15000/yr into either your 401K or IRA AND pursue the debt payoff route, you'd have $250K in your nest egg. I'd consider going into "emergency mode" for the next 5-6 years. (Look at any and all ways to decrease expenses and increase income).

If your XH does retire, you could ease up immediately and start living the good life, or if he passes (not wishing him ill, of course), you could also ease up. But if you prepare for the worst and it did happen, you'd be in a better position.

So, my advice would be to prioritize the debt - identify what must be paid off before you retire and what you could carry in retirement. Second, I'd set a specific savings goal for retirement, divide the goal by 6 and aim to set that amount aside each year for the next six years. Kind of a two-pronged approach.

[Gardening Grandma]

One more thing:
The withdrawal rule of thumb is that if you want your nest egg to last 30 years you should not withdraw more than 4% the first year. After that (according to the 4% rule of thumb) you'd increase the dollar amount of the first year by inflation And a number of retirement studies indicate that this may be too much. It also depends on how it is invested. 4% of $160K would be a gross of $533/mo or $453 if you have 15% withheld.

DH and I have been taking a flat 4% (no increase for inflation), but we've decided for next year anyway to decrease that to 3.5%...

You want that $160K to grow if at all possible, so if you can leave it alone the first years of retirement, you'll be better off in the long run.

[bring in the new year]

I don't like annuities so keep that in mind.

If you did purchase an annuity would it be indexed to inflation? Because if it isn't then don't do it.

We may have had a couple of decades without inflation (real inflation here) but you're old enough to remember the 70s.

You also said that this house is not the one you want to spend the rest of your life in. So where would you like to live? And is it possible for you (in your real estate market) to think about putting this house for sale and living somewhere cheaper?

[seriousthistime]

Grandma,
I wrote:

If I retire at 66 at $3,175/mo, I will have no debt payments other than mortgage.
Or alternatively I will have more in my 401(k) which means more income than $3,175. And $3,175 is slightly more than what I take home now.

And I have no idea what I was thinking when I said I take home slightly more than $3,175 now. I take home almost twice that. I'm glad you picked up on that, because not only is it wrong, but then you went through what taxes would be, so thanks for the reminder; I need to take into account income taxes. I live in a state with income tax. I ran my projected numbers and figured 3% withdrawal from the $160,000 in the 401(k) (comes to $4,800) through H&R Block's income tax calculator and found that I would owe $936 income tax for the year. State tax would be nil because most of the income would not be taxed. So my $3,175 in SS and pension would be about $3,100 after tax.

I have scanned my posts for other inaccuracies, and have another minor tweak. The mortgage is closer to 27 years left, not 28. If I refi'd and made payments equivalent to paying the thing off in 27 years, I'd save just under $40/mo but my mortgage balance would be $2,000 less when I turn 66, than if I do not refi.

Yes, the car will be 13 years old with 100K miles on it, but for a Honda it should be far from used up! I am not a car-oriented person and don't have to be driving a fancy car.

Crone, as far as brushing up skills, my job is the sort that requires me to stay current. No brushing up needed unless I were to branch out and go into an entirely different line of my profession.

Bridget, the 401(k) annuity is not inflation-indexed. If I were to get the money through an inflation-indexed annuity, increases would be tied to the CPI and limited to 3% per year. The starting figure would be $625 rather than $900, a huge drop! Since SS and the pension are inflation-indexed, I think if I were to go this route with the 401(k) I would take the higher amount and try to bank some of the $900 to cover inflation in future years. I am drawn to Phil's comment about investing it myself to get income and yet keep the $160,000, though. I am not counting on 6% return, and if there was a safe 6% investment it would indicate that inflation had perked up so it's a mixed bag.

This house is not the one I want to live in for the rest of my life. For one, I could live in much less space. Also, it is not where I care to end up. Trouble is, I am not sure yet where I want to end up, and unless I can transfer to another secure position where I do want to end up, it's not worth selling this house right now. If I decide to stay in this area, I can sell the house when the time comes. The current house is all on one level so it is suitable for getting older.

I'll be scouring the budget today to see how I can pay off all but the mortgage by age 66, and increase my 401(k) contributions now.

[seriousthistime]

Correct, tbird. It's a decision that is better made when the time comes. The money will be there. It is a matter of how and when to take it.

My current thinking, thanks to the collective wisdom here, is to put $17K into the 401(k) next year. As it is, it will not make much difference to my debt repayment because this was an expensive medical year and knowing this up front, I put a lot of money into my FSA. Whether next year will be similarly costly is not certain so I hesitate to put in a similar amount.

[Gardening Grandma]

My current thinking, thanks to the collective wisdom here, is to put $17K into the 401(k) next year.

If you want advice on investment choices, this is a great site:

www.bogleheads.org/forum/viewforum.php?f=1

This site has some good reading on preparing for retirement

bobsfinancialwebsite.com/

[Peace77]

You're doing great.

Just plan to keep working until age 70 or 72. If you are healthy, there's no reason, you can't continue working and adding to your retirement funds.

These days more people are living past age 100.

[ontrack]

Dec 3, 2011 12:32:55 GMT -5 seriousthistime said:

Another thing: I was married before this XH, for more than 10 years. I understand that if 1st XH dies I am eligible to receive the SS survivor's benefit on his account because I am now 60. That might be approximately what I would get on my own account at age 62 (but I really have no idea because I don't know what he made). And do I understand correctly that I could collect that amount until I am age 66-70 (in that range), and then collect the higher benefits on my own account?

This part struck me--I did not think you could collect on your first XH's SS because you remarried, which severed your claim on it.

[cronewitch]

Dec 5, 2011 13:31:09 GMT -5 ontrack said:

Dec 3, 2011 12:32:55 GMT -5 seriousthistime said:

Another thing: I was married before this XH, for more than 10 years. I understand that if 1st XH dies I am eligible to receive the SS survivor's benefit on his account because I am now 60. That might be approximately what I would get on my own account at age 62 (but I really have no idea because I don't know what he made). And do I understand correctly that I could collect that amount until I am age 66-70 (in that range), and then collect the higher benefits on my own account?

This part struck me--I did not think you could collect on your first XH's SS because you remarried, which severed your claim on it.

That is my understanding too. SSA.gov has all the rules but I understand you can't remarry before 60 and keep the entitlement.

I plan to think about collecting on my ex we were married 17 years and I have not remarried and am 63.

[bring in the new year]

See why I don't like annuities?

To me they're like a black box. They're going to drop your payout by $275 a month. And yet it would take 41% inflation to get you back to the $900 figure.

Do you know what the fees are & how they're calculated? And is there a commission for the plan broker if you buy one?

What's the appeal of an annuity for you? Because if it's safety, I'd still rather go with bonds.

[seriousthistime]

According to the SS website, the marriage must have lasted 10 yrs and you are age 60 or older. "in general, you cannot receive survivors benefits if you remarry before the age of 60 unless the latter marriage ends, whether by death, divorce or annulment."

If you remarry after age 60, there is no requirement that the latter marriage has ended; you can collect survivors benefits on the former spouse at 60 and at 62 collect spousal benefits on your current living spouse if that would be more.

[nogooddeed]

Dec 4, 2011 10:02:54 GMT -5 seriousthistime said:

Grandma,
I wrote:

If I retire at 66 at $3,175/mo, I will have no debt payments other than mortgage.
Or alternatively I will have more in my 401(k) which means more income than $3,175. And $3,175 is slightly more than what I take home now.

And I have no idea what I was thinking when I said I take home slightly more than $3,175 now. I take home almost twice that.

You take home over $6,000 per month with fairly low debt levels. What the heck are you doing with the rest of the income?

[seriousthistime]

I know, nogooddebt, it does look ridiculous, but I don't think my debt levels are fairly low. $77K for CC's, HELOC and car loan? It is astronomical to me! I have been attempting to pay off a lot of debt the past few years, and I have paid off more than the $50,000 in the past four years that I have been racing on the WIRR. More has been paid off but doesn't show up on my racing chart/stats. Seems like I'm trying to strike a balance between living and paying off debt.

Regardless, I am going through my budget with a fine-tooth comb and am looking now to find more to cut in the budget. I think I know where my main budget leaks are, but it could be I will find some that I haven't paid attention to. You're right, on my income I could be doing better than I am.

[qofcc]

It sounds like you would like to work for another 6 years and after you're done working, you'd like to sell your house and re-locate, but as long as you're working you'd prefer to stay in it. You also have multiple credit cards, a HELOC and a car loan. You're also thinking about re-financing the house and you have equity in it. Since you're 60, you could drawing from your retirement savings without penalty at any time if you needed to. You're also probably in a fairly high tax bracket.

Provided the home values are not forecasted to drop dramatically in your area, I think it that situation I would look into doing a cash-out re-finance for as much as they would loan even paying PMI and roll as much debt as possible into it. Between your assets and guaranteed income/safety nets, you're really in no danger of needing to declare bankruptcy even if you lost your job right now, so I don't think moving unsecured debt to secured is too risky a move for you. Once the monthly payments are as low as possible, I'd agressively contribute to retirement. To the traditional IRA first, then 401K unless you think you might save enough to reach the 15% bracket, then you could move the money from the traditional to the Roth. Postponing paying taxes on your money until you drop from the 25% bracket into the 15% is going to save you more than you're saving by pre-paying low interest debt and having one big monthly payment plus an automatic retirement contribution rather than multiple minimum payments that you randomly pay extra towards could help you with the leaks in your budget.

When your boss retires, you've said you'll have a year to come up with a new plan. At that point, your options are wide open.

[Bluerobin]

Serious, if you go early, plan on health care costs increasing. When I retired, the company provided health care free of charge. It is going to be almost $400 a month starting in January.

[seriousthistime]

queenofcc, you have given me much to think about. While I hate to take on more secured debt to pay off unsecured debt, I see the logic of having one big chunk of PITI to pay each month, at low interest, and nothing else. Actually I think I would stick with the car payment; it's low enough and it's a "Rule of 78s" loan so it's not to my advantage to pay it off early. This is from bankrate.com:
With a loan using this rule, the lender typically collects three-fourths of a loan's interest in the first half of the loan term. The earlier you try to pay off one of these loans, the more you'll have to pay. The higher the interest rate, the more that payoff amount is going to hurt. Check the front of a loan contract to see whether it allows a refund or rebate of interest. That's a sure sign you've signed on for a pre-computed loan.

I am interested in seeing what my payments would be if I were to max a refi, get rid of all the debt except car loan, and start throwing cash into every tax deferred program I can, and then when I have maxed them out, throwing money into taxable savings. If I do an FHA refi for the maximum amount, it would also be assumable at this low rate. If prices depreciate significantly (where I am they have dropped a bit but not much), I would be able to bring cash to the closing to make up the difference, or rent out the house.

[Gardening Grandma]

Message deleted by Grandma Grinch. Posted on the wrong thread. Sorry