Q. As of last week, I am retired. I am single, 73, and got a late start saving for retirement. I did not work until I was 41, helped my two children through college (now married and supporting themselves). This left me with very little money. I did not have a high-paying job--- or one that had any type of 401(k) or pension--- until 1994.
I have a townhouse worth about $150,000 with a 15-year loan of $50,000 at 5.85 percent. I own a recent-model car. I’ll have a pension of $1,000 a month and Social Security of $2,100 a month. I also have about $100,000 in retirement plans, most of it in cash, and $13,000 in checking account cash.
I would like to pay off my townhouse with my 401(k). Should I? Or should I wait until January 2010, when my income will be lower for tax purposes?
I can easily live off Social Security and my pension if I do not have a mortgage payment. But if I have to, I can survive until January 2010 with a mortgage payment. Also, upon retirement I will have very little life insurance. Do I need to purchase more? I plan to have Medicare and an AARP program for medical insurance coverage and prescriptions (which I estimate to be about $285 a month). I plan to keep the dental insurance the firm is offering, which is $47 monthly, with $2,500 of coverage for a year. I know I need more money for retirement, but that's all I have. ---E.H., by email from Houston, TX
A. If you were someone in her late 50s or early 60s, many would suggest keeping the mortgage as a hedge against future inflation. With government deficits ballooning, it's pretty easy to imagine paying off today's debts with dollars of much lower purchasing power.
But at 73 it's better to go with what you know today. Paying off the mortgage will reduce your monthly expenses significantly. As a practical matter, it will be better to pay it off over two, possibly three, years because every payoff dollar taken from your 401(k) will be added to your taxable income. That, in turn, may trigger taxation of Social Security benefits, move you into a higher tax bracket, or both. So see an accountant before you start taking big chunks out of that retirement account.
But when the mortgage is paid off you will still have about $60,000 in savings. That’s nearly two years of retirement income. This will help you deal with expenses that may exceed your retirement income.
If you know what your income is and have no debt, you can then focus on how you spend your money. You--- and millions of other Americans--- can be more productive and resourceful than any business or government institution in making decisions that will make your dollars go further.
You also have another long-term option, which is to sell your home and use the equity as either a source of rent money or as a payment for living in a retirement community when you are older.
As a single person, you don't need life insurance.
Q. Does a pension check constitute earned income? I was caught in a downsizing at my workplace in 2004 and was offered an early buyout option. It included a payment of estimated Social Security along with my pension check. That extra Social Security bridge payment will end this year, as I will turn 62 in September. The total payment I received last year and reported to IRS was $43,580 --- my pension check plus the Social Security bridge payment. My “earnings” this year would be about the same, until that Social Security estimated check stops in September. Does that mean if I file for Social Security benefits this year I would lose the Social Security benefits filed for since my reported “earnings” were over $42,480? ---J. M., by email from Grand Prairie, Texas
A. No. Your pension check and bridge money are not considered wage income, and employment taxes are not deducted from it. As a consequence, it has no impact on the reduction of Social Security benefits that can occur between age 62 and full retirement age, if you work. That’s the good news.
The pension check, however, will be included in the income that is used to calculate the portion of your Social Security income that will be subject to federal income taxes.